The Securities and Exchange Commission (SEC) is the heel of the crypto market, there’s no doubt. Gary Gensler’s regulatory agency has been going full scorched Earth on the industry. It seems the SEC is attempting to get reins on the many projects operating outside of the government’s purview. It is also looking to establish a precedent that would favor giving it the brunt of the regulatory responsibilities when Congress does bring crypto infrastructure into law. Today, they got a big break after beating LBRY (LBC-USD) in court. What might this mean for Ripple (XRP-USD), who’s in a very similar position to its defeated peer?
LBRY is certainly not the best-known blockchain project, but it shows a lot of potential for the technology. The network handles both payments and file-sharing across the blockchain, working specifically with decentralized social media and content-sharing platforms. The business model is very promising, especially amid the controversy surrounding Elon Musk’s purchase of Twitter and the sweeping, controversial changes coming to the platform. LBRY is powering platforms calling themselves alternatives to sites like Twitter, putting decentralization above all else to prevent similar fates.
Valiant as its efforts are, LBRY is not going with SEC scrutiny — even as a project toting a market capitalization of just $9 million. The agency, criticized before for going after smaller projects rather than the “big fish,” sued the company in 2021 for selling an unregistered security via its LBC coin.
Well, this week, the year-long battle is coming to an end, and LBRY has lost. However, this isn’t just a loss for the company. The ruling has widespread implications for most of the blockchain industry. In fact, the ruling could be stirring up some concern around the Ripple case.
LBRY Lost to the SEC, but Will Ripple Do the Same?
LBRY’s loss to the SEC really didn’t hurt many investors. The LBC crypto is the 796th largest cryptocurrency on the market, according to CoinMarketCap. It only ever sees about $10,000 worth of trades on a given day. And yet, this battle puts lots of other investors’ money in danger. The strategy the SEC won the case with is one it’s using in other cases involving larger cryptos. With the Ripple case winding down, one must wonder whether the ruling adds juice to the SEC’s argument.
According to the ruling document, the SEC was able to convince the court that LBRY completed an unregistered securities offering by selling its LBC crypto. It does so by labeling LBC a security under the conditions of the Howey Test, a precedent set in a 1946 court case for evaluating whether something is a security.
The victory is a big one for the SEC, which uses the Howey Test in most of its crypto lawsuits. Most prominently, it has been using this test against Ripple in a lawsuit that has been dragging on since late 2020.
In recent weeks, investors have been expecting the suit to come to a close, with the judge involved calling for summary judgment filings in September. And late last week, many were convinced that Ripple was in a winning situation as the SEC requested deadline extensions for its filings.
However, with this LBRY ruling going in the SEC’s favor, one must take a step back. Does the SEC now have a leg to stand on in the Ripple case? Could the Howey Test be used to label XRP as a security as well? One victory sets a precedent. But, a second could greatly reinforce the power the SEC is looking to harness over crypto.
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On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.