SEC Reduces LBRY Fine, Impact on Crypto Regulation and Future Innovation

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The Securities and Exchange Commission (SEC) has recently revised its fine against blockchain-based content-sharing platform LBRY from a massive $22 million penalty to a significantly reduced fee of $111,614. This change came after considering the marketplace’s financial struggles and its “near-defunct” status, which made it difficult for the company to afford such a high fine. Additionally, the SEC withdrew its request for disgorgement or forfeiture of ill-gotten gains in light of LBRY’s financial situation.

In March 2021, the SEC filed a lawsuit against LBRY, accusing the company of offering LBRY Credit tokens (LBC) without registering them as securities. LBRY’s CEO, Jeremy Kauffman, expressed his concerns that this decision has the potential to endanger the entire US crypto industry as it establishes a precedent that might classify “almost every cryptocurrency” as security.

Although LBRY didn’t conduct an initial coin offering (ICO) or a similar public token sale, the SEC alleged that the team retained tokens for themselves through a “pre-mine” process and subsequently released them on secondary exchanges to generate funds for their operations.

A federal judge recognized that the tokens incentivized LBRY’s team to develop the network in November 2022, which created the perception among investors that investing in LBC on secondary markets would yield profits. As a result, the SEC achieved victory in their case through a summary judgment. LBRY then retaliated in December 2022, stating that the requested $22 million disgorgement wasn’t a reasonable approximation of profits causally connected to the violation.

Now, the SEC is seeking an injunction to prevent LBRY from violating Section 5 of the Securities Act of 1933, which prohibits unregistered offerings of crypto securities. The injunction will remain in effect until LBRY meets two requirements: disposing of its LBC holdings and dissolving the company, as the company has expressed its intent to do in court.

According to the SEC, there is a reasonable likelihood that LBRY will violate Section 5 again, justifying the necessity for injunctive relief. However, LBRY contends that an injunction is unnecessary as the company is already in the process of shutting down operations and burning existing LBC tokens.

Although there are clear hurdles on the path to achieving a regulated future for cryptocurrencies, it is essential to continuously examine and adapt the approaches taken in cases such as LBRY to ensure regulations are fair and efficient. As the crypto industry and blockchain technology evolve, a balance must be struck between investor protection and innovation while respecting the interests of both regulators and industry players.

Source: Blockworks

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