Quick Note on FTX; EU Delays MiCA Vote; Judge Rules Against LBRY in SEC Enforcement Case

DEF Weekly Roundup - November 10, 2022

A Quick Note on FTX

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There is immense uncertainty right now about what has happened and what is happening, and we'll share more of our thoughts as the situation begins to clear up (hopefully) next week. 

What is clear today is that a lack of transparency and a breach of trust were the core contributors to this debacle, which joins a string of others in what we can only hope to be this industry's annus horribilis. 

We're here to help realize a world in which anyone can enjoy the benefits of DeFi protocols, public blockchains, cryptocurrencies, and self-custody. This week should underscore the importance of that mission, and we hope that this terrible situation—which has already hurt too many people in these few days—will motivate everyone, as it does us, to firmly re-center that vision in our decisions and our work. 

Regrettably, most people will consider this a "crypto disaster." We won't sugarcoat it: the hill just got much taller and much steeper. It's up to all of us to prove that building decentralized systems immune to the failings so clearly evidenced this week is the very reason we are here.

Now, in other policy news…

EU Delays MiCA Vote

What happened?

On Friday, the European Union (EU) delayed their vote on Markets in Crypto Assets regulation (MiCA) until February due to its complex text.

Quick refresher: the law intends to regulate crypto-asset service providers (CASPs) and establish a uniform EU legal framework for digital asset issuance and custodial businesses.

Last month, the European Parliament Committee on Economic and Monetary Affairs (ECON) approved MiCA in a 28-1 vote, where they agreed upon consumer protection provisions and a legal framework for regulating public offers of crypto-assets.

What does this mean?

As we’ve previously stated, MiCA focuses on regulating centralized businesses and asset issuers but it will influence (and has already influenced) the course of global crypto regulation.

MiCA is an extremely complicated legislative package in a novel area, so it’d be worrying if it weren’t an arduous process to get into fighting shape. The technical revision process has included some pretty… non-technical substantive changes, but we don’t think this delay should be read as the EU losing interest in getting MiCA done. 

Judge Rules Against LBRY in SEC Enforcement Case

What happened?

On Monday of this week, a New Hampshire federal judge ruled that crypto startup LBRY violated federal securities law by distributing its token, LBC. 

In March 2021, the SEC sued LBRY, a blockchain-based content-sharing network, alleging that the token was a security and its distribution constituted an unregistered securities offering. In the court’s opinion, the judge highlighted that “no reasonable trier of fact could reject the SEC’s contention that LBRY offered LBC as a security.” 

The judge went on to explain that “nothing in the case law suggests that a token with both consumptive and speculative uses cannot be sold as an investment contract,” rejecting LBRY’s argument that LBC’s utility precludes it from being designated a security. 

What does this mean?

It’s difficult to gauge the overall impact a ruling like this will have on future litigation. On the one hand, this is a district court decision meaning it is not binding precedent for other courts to follow; however, given the relatively small number of cases addressing this issue, it could be uncommonly precedential. It’s discouraging to see the court reject wholesale the argument that a token having utility does not weigh against its potential status as a security. 

More broadly, we’d be unable to sleep if we failed to reiterate that the “security question” is only consequential because the SEC has ensured there is no legal way for blockchain-based securities to be traded in this country. And so it’s unsurprising that “investors” enjoyed a 50% haircut immediately following the decision.