Until Ripple ruling, crypto industry won’t know impact of regulator win over LBRY

(Reuters) – Digital media company LBRY Inc asserted in a series of tweets on Monday that the entire cryptocurrency industry is now under threat, after a New Hampshire federal judge ruled that its digital tokens are securities that must be registered with the U.S. Securities and Exchange Commission.

“The language used here sets an extraordinarily dangerous precedent that makes every cryptocurrency in the U.S. a security,” LBRY tweeted. “Even after five years of fighting and a court ruling, we still honestly do not know how to legally launch a public blockchain in the U.S.”

Should the cryptocurrency industry panic?

There is no doubt that the ruling from U.S. District Judge Paul Barbadoro of Concord, granting summary judgment to the SEC, is ominous for crypto token creators concerned about SEC regulation. The judge, as my colleague Jody Godoy reported on Monday, rejected LBRY’s arguments that its tokens are a true cryptocurrency used primarily to pay for services on its blockchain-backed data network and that the SEC failed to provide fair warning that it would sue over unregistered tokens that did not enter the market in an initial coin offering.

Barbadoro held unequivocally that LBRY’s tokens were investment contracts under the U.S. Supreme Court’s 1946 test in SEC v. Howey. In the LBRY case, the judge said, the only contested element of the three-pronged Howey test was whether token purchasers were led to expect profits based on LBRY’s efforts. Barbadoro said that early investors and blockchain miners who received the tokens had such an expectation because they knew LBRY’s operations relied on the tokens’ increased value.

In perhaps the most consequential language of the ruling, Barbadoro said any reasonable purchaser of the tokens would expect LBRY to use its own stake — hundreds of millions of tokens — to boost the value of the cryptocurrency. That structure alone, the judge said, “would lead purchasers of [LBRY tokens] to expect that they too would profit from their holdings of [the tokens] as a result of LBRY’s assiduous efforts.”

That’s ominous language, considering that the LBRY model, in which blockchain developers retain a big stash of the tokens that serve as currency on their platforms, is not at all unusual.

But I’d suggest the industry wait for a decision in the SEC’s closely watched case against Ripple Labs Inc, before deciding that the sky is falling.

In summary judgment briefing underway before U.S. District Judge Analisa Torres of Manhattan, Ripple has advanced arguments that LBRY’s lawyers at Perkins Coie did not assert — including a position that seems designed eventually to appeal to the current Supreme Court’s preoccupation with historical practices.

Ripple, whose lawyers declined to provide me with a statement about the LBRY ruling, has also developed a much more robust record than LBRY to support its assertion that the SEC failed to provide fair notice about which crypto tokens it would deem to be securities.

The SEC, which declined to comment specifically on the LBRY or Ripple cases, said in an email that “digital assets that qualify as securities under the criteria long-ago set out by the Supreme Court cannot be given a pass from the securities laws.”

The commission’s summary judgment brief in the Ripple case is obviously filled with background facts about what the SEC alleges to be a years-long, $2 billion offering of unregistered securities by a company that had ample warning it was skirting the law. Nevertheless, its legal arguments for why Ripple’s tokens qualify as securities under the Howey test are quite similar to those the SEC asserted in the LBRY case.

But Ripple (and its chairman and CEO, who are also defendants in the SEC proceeding) offered different defenses than LBRY. Ripple reached back to state-law cases underlying the Supreme Court’s Howey ruling to argue that an investment contract can only be considered a security if the promoter and investor entered a contract that required the promoter to take particular actions to benefit the investor and granted the investor a specific right to share in profits generated by the promoter’s efforts. Defense counsel from Debevoise & Plimpton; Kellogg, Hansen, Todd, Figel & Frederick; Paul, Weiss, Rifkind, Wharton & Garrison; and Cleary Gottlieb Steen & Hamilton said there was no such contract between the Ripple defendants and purported investors who received tokens through donations, giveaways and even sales.

Ripple’s brief argued that even after Howey, neither the 2nd U.S. Circuit Court of Appeals nor the Supreme Court has held the sale of an asset to be an investment contract unless the promoter and purchaser had specific rights and obligations. Ripple drew an analogy between its tokens and diamonds, arguing that when DeBeers sells uncut diamonds, it is not entering into investment contracts with buyers, even if those buyers expect to profit from the diamonds they’ve bought.

In the LBRY case, remember, Barbadoro said that LBRY’s control of hundreds of millions of tokens was a signal to investors that the company would act to prop up their value. Ripple pointed again to the diamond market to argue otherwise: The SEC does not regulate diamond purchases as securities deals, Ripple said, despite DeBeers’ marketing efforts.

Ripple is also asserting a much more sweeping fair notice defense than LBRY, which argued simply that the SEC previously acted only when token issuers conducted public offerings. The New Hampshire judge said LBRY failed to show that the SEC pledged only to enforce the Howey test for tokens sold in ICOs and that the Howey test itself contained no such restriction. (LBRY counsel from Perkins Coie declined to comment on differences between their arguments and Ripple’s.)

Ripple argued in its response to the SEC’s summary judgment motion that the commission’s own files reflect years of confusion and uncertainty within the agency about how or whether to regulate cryptocurrencies. “No wonder that market participants were unsure what to think,” Ripple said. At the very least, it argued, the notice issue must be hashed out at trial.

There are, to date, nearly 700 docket entries in the Ripple case, compared with only 86 in LBRY. If the SEC wins summary judgment against Ripple, the industry will have real cause to worry.

Read more:

U.S. securities regulators win case against crypto company LBRY

Coinbase joins crypto supporters siding with Ripple in SEC case

Ripple’s top lawyer slams SEC for ‘offensive’ use of unsealed legal memos

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.

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Dubai grants crypto exchange Binance a virtual asset licence

A representation of the cryptocurrency is seen in front of Binance logo in this illustration taken, March 4, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

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DUBAI, March 16 (Reuters) – The world’s largest cryptocurrency exchange Binance has been granted a licence to conduct some operations in Dubai, the company said on Wednesday, from where it plans to carry out regional business.

The awarding of the Virtual Asset Licence from Dubai’s recently formed Virtual Asset Regulatory Authority (VARA) comes after Gulf neighbour Bahrain on Tuesday awarded Binance a crypto-asset service provider licence, its first such licence from a Gulf Cooperation Council (GCC) country. read more

“Binance will be permitted to extend limited exchange products and services to pre-qualified investors and professional financial service providers. All licensed VARA service providers will be monitored progressively to open access to the retail market,” Binance said in a statement.

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The crypto company will also anchor a blockchain technology hub in the Dubai World Trade Centre (DWTC), it said.

Financial regulators across the world have targeted Binance, with some banning the platform from certain activities and others warning consumers that it was not licensed to operate in their jurisdictions. read more

The United Arab Emirates (UAE), the Gulf region’s financial capital, has been pushing to develop the virtual asset sector and regulation to attract new forms of business as regional economic competition heats up.

Dubai, one of the UAE’s seven emirates, last week adopted its first law governing virtual assets and established VARA as a regulator to oversee the sector.

Binance said in December it was working with DWTC to help set up an international virtual asset ecosystem in Dubai and assist with the development of virtual asset regulations.

“Binance will be able to operate its regional business from Dubai in the newly announced regulatory ecosystem that is subject to comprehensive legislation and internationally applicable policy frameworks,” DWTC Authority Director General Helal Saeed Almarri said.

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Writing by Lisa Barrington
Editing by Mark Potter

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Crypto exchange FTX US valued at $8 bln as first fundraise draws SoftBank, Temasek

A representation of the virtual cryptocurrency Bitcoin is seen in this picture illustration taken October 19, 2021. REUTERS/Edgar Su

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Jan 26 (Reuters) – Cryptocurrency exchange FTX US said on Wednesday it had notched a valuation of $8 billion after raising $400 million in its first funding round from investors including Japan’s SoftBank Group Corp (9984.T) and Singapore’s Temasek Holdings (TEM.UL).

The Series A funding also includes investments from crypto investment firm Paradigm and Multicoin Capital.

“What this raise means to us is that we are officially establishing ourselves on the stage of the largest competitors of cryptocurrency exchanges in the U.S., and signaling to the world that we are going to continue to expand very rapidly,” FTX US President Brett Harrison said.

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With the value of cryptocurrencies surging, surpassing $3 trillion in November, venture capital investors are increasingly looking to put down stakes in the industry.

Venture capital firms invested $30 billion in crypto in 2021, according to research firm PitchBook.

Chicago-based FTX US was launched in 2020 by former Wall Street high frequency trading executives, and competes with leading crypto exchanges Coinbase and Binance.

In October, FTX US acquired LedgerX in a move to expand into crypto futures and options trading.

FTX US had an average daily volume of about $360 million in the third quarter, according to the company. Its users increased by 52% quarter over quarter, though the company has declined to share how many users it has overall.

FTX US said it intends to use the funds to grow its user base and launch new business lines, and will also consider strategic investments and acquisitions.

It also plans to expand its 100-strong staff, said Harrison, who previously worked at Citadel Securities.

“By having this capital, we’re able to go out and be competitive and hire the best people,” he said.

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Reporting by Hannah Lang in Washington; Editing by Himani Sarkar

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