Regulation Looming

Boy, what a week! First the smack in the pants with the SEC ruling on Library then the kid that ruins the party for everyone by pissing off the parents in FTX collapse.

I've got the "adults are coming" vibe.

There's live coverage on FTX everywhere, so we are going to focus on the second potential bombshell  - The SEC ruling against LBRY. Today is a long one so grab your chair and a coffee for this.

Court rules in favour of the SEC against Library (LBRY)

Only a few years ago, in a regulatory framework far, far, from friendly...The SEC (Securities and Exchange Commission) opened a lawsuit against Library (LBRY). For those in the space just 2 years ago, you may remember the wave of SEC investigations into altcoin projects launching at that time. One of these was Library.

"LBRY does to publishing, what Bitcoin did to money"

What is Library: For most users, LBRY was meant to be a place to find great content. Like a decentralized digital version of The Great Library (Avatar). Beyond being the next generation of content, LBRY had many components that worked together under the hood to make its ecosystem great for users and creators. In simple terms, here's what it does.

• It allows anyone to build apps that interact with digital content on the LBRY network.

• These apps allow the user to upload to the LBRY host network, where they can then distribute the content for free or for a determined charge set by the creator.

• The uploaded content could be videos, audio files, documents, or any other type of file.

LBRY aimed to be an alternative to sites like YouTube, Twitter, and Instagram, allowing publishers and their fans to interact directly without the risk of demonetization or de-platforming.

The Howey Test: Now the laws surrounding "Securities" have been plaguing crypto for around 5 years. The tool the SEC uses to define "Securities" is called The Howey Test. For the uninitiated here's a rundown of what it is.

The Howey Test is a 3-prong test used to determine ultimately if an “investment contract” exists, in other words, a Security. 

• Is there an investment of money

• In a common enterprise

• With the expectation of profit derived solely from the efforts of others.

If all 3 boxes are checked, the entity/token is labelled a Security.

Now that we know the rules, let's see what the fuss is about.

LBRY And XRP, same case, different outcomes

Almost 2 years ago the case against LBRY was opened. It is important to note that this case was opened after the Ripple (XRP) lawsuit but closed first. There are a couple of reasons for that.  Let's break it down, shall we?

• The Ripple case is in the 2nd Circuit court (New York). The LBRY case is in the 1st Circuit court (New Hampshire). Why is this important? Different courts have different judges and often look at the same law in two different ways. Compared to the LBRY case, the Ripple case has a much more favourable judge. 

• The amount of dispute on the Howey Test. In the Ripple case, all 3 components are in dispute. The Ripple team maintains that the court cannot satisfy any of the components to label XRP a Security. In the LBRY case, only 1 prong is in dispute, making it a much simpler task for the SEC.

The ruling against LBRY

In the judge's ruling, it is stated "In the LBRY case only the 3rd component is in dispute". The key takeaway here is that there was enough evidence against the first 2 components that the LBRY legal team did not or was not able to dispute them. 

In the case of the 3rd component, many articles of evidence were brought to bear in the courts. The most highlighted of these was a blog post from LBRY about the valuation of LBRY skyrocketing at the time. The post entitled "1.2B and we don't care.", was used as evidence of flaunting LBRYs recent dramatic price increase, while the protocol at the time only had 3 videos on the entire network, all of which were produced by LBRY.

Beyond this, the judge took issue with internal team emails that discussed token price, Tweets about price movements, and valuation. However, the really important bit was the issue with LBRYs message at the time quoted "We are a work in progress, bear with us".

This statement is HUGE and we will discuss why in the next section.

The takeaway here is that these messages both internal and external were used by the SEC to show the overall message was about growth potential, stating "LBRY's messaging amounts to precisely the “not-very-subtle form of economic inducement” the First Circuit identified in SG as evidencing Howey's “expectation of profits.” See SG Ltd., 265 F.3d at 54-55.

The LBRY token sale was also under scrutiny here. The judge stated "The problem for LBRY is not just that a reasonable purchaser of LBC would understand that the tokens being offered represented investment opportunities - even if LBRY never said a word about it. It is that, by retaining hundreds of millions of LBC for itself, LBRY also signalled that it was motivated to work tirelessly to improve the value of its blockchain for itself and any LBC purchasers."

Simply put, it didn't matter if they had given the expectation for growth at all, that any offering of any token for any reason could constitute the 3rd component in and of itself. Scary right? Every altcoin founder should be shaking in their boots.

Precedent and the future of crypto

So what is the big deal if one crypto project get's labelled a Security anyways? Remember that little message LBRY was pushing about being a work in progress? You might have seen a few other notable projects saying similar things. Most notably, and most recently with ETH (Ethereum). There are several instances, of Vitalik speaking on the progress of ETH, especially around the time of the Merge to POS. See for yourself.

This ruling is dangerous, as it neatly places any type of "incomplete" or "Early Development" project in the same boat. Projects that use this type of messaging will likely continue to be under the heavy scrutiny of the SEC. This alone makes it hard for Founders, and really anyone within the long reach of the SEC to raise capital via crypto offerings of any kind that use a pre-mine model (like most projects use today). I mean who wants to invest in something where there isn't an expectation of potential growth?

Our take

This ruling is about much more than just LBRY, it affects all of crypto including gaming projects. This sets a precedent with potentially far-reaching capabilities. Under this ruling, Ethereum and every other alt-coin that ever sold any tokens could be labelled a Security. There now seems to be a pretty obvious reason why SEC chair Gary Gensler won't admit that ETH is a Commodity. Add the FTX event to this and we might be in for a rough ride. Strap up, folks!

Want to read the ruling yourself, click here.

Back to gaming with the sneaky news, you may have missed

• FIFA announces 4 new Web3 titles after split with EA: In a company statement posted to FIFA+, FIFA says they are rolling out “a portfolio of new future-focused web 3.0 games to entertain and engage a wider group of fans ahead of FIFA World Cup Qatar 2022." The four games are all Web3, and FIFA says they have been built with “the future of digital engagement in mind.” Read it yourself here.

• Microsoft invests big into Korean blockchain company Wemade: Korean blockchain start-up "Wemade" recently raised a massive $46 million in funding. Microsoft’s portion was a whopping $14.8 million making this a rather large play for Microsoft. "Wemade" began its journey in 2018 with its first blockchain game "MIR4". One of the earliest blockchain games on the market that today has over a million users worldwide. Wemade has previously launched its own blockchain gaming network called "Wemix" where players are able to auction off and bid on NFTs usable within the Wemade suite of games. Wanna know more? Click here.

Latest on FTX

FTX files for chapter 11.

And the memes rolled in.

Rough. We've got to take time to reflect on what we are building to make sure we build with ethics in mind.

On that sombre note, I bid you adieu and a better next week - I mean how much worse can it be?

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