SEC Commissioner Expresses Dissent on LBRY Case Outcome

On October 27, 2023, Securities and Exchange Commission (SEC) Commissioner Hester M. Peirce voiced her dissent regarding the commission’s litigation against blockchain firm LBRY, Inc. (“LBRY”). This litigation emerged from the SEC’s enforcement action initiated in March 2021, accusing LBRY of conducting an unregistered securities offering through its token sales. The federal district court ruled in November 2022 affirming the SEC’s position that LBRY’s tokens were indeed securities. LBRY sought to challenge this verdict but later withdrew its appeal in October 2023, deciding instead to cease operations due to accumulating legal costs.

Commissioner Peirce finds the LBRY case particularly disconcerting among a series of crypto enforcement actions undertaken by the SEC. Unlike many fraudulent crypto projects, LBRY had a functioning blockchain with real-world applications, specifically in data sharing and censorship resistance. The firm created a popular platform for video and media sharing on its blockchain, contributing to the decentralized ecosystem. Despite such contributions, the SEC’s hardline stance saw LBRY facing a hefty penalty demand of $44 million, later reduced to $111,614 post-remedies hearing.

The commissioner underscored the regulatory ambiguity surrounding token offerings. The lack of a clear framework for registering functional token offerings is a hurdle for blockchain projects like LBRY. Even with registration, compliance might not yield any substantial benefits for such firms. Commissioner Peirce stressed that the resources expended on the LBRY case could have fostered a conducive regulatory environment for blockchain innovations.

Peirce, often heard opposing the SEC’s stringent crypto enforcement, sees a need for balanced regulation that encourages innovation while protecting investors. The disproportionate reaction in the LBRY case, she argues, would deter entrepreneurs from exploring blockchain technology’s potential. The case’s outcome, seen as heavy-handed, does little to protect LBRY investors who, arguably, would have preferred the company’s continuity over its dissolution.

In light of the unfolding regulatory actions against crypto enterprises like Binance and Coinbase, the call for a more balanced approach to crypto regulation is growing louder. SEC Chair Gary Gensler’s invitation to crypto firms to engage with the regulator reflects an evolving dialogue, albeit with prevailing challenges.

Image source: Shutterstock


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Coinbase CEO Compares SEC to Soccer Refs in Criticism of Lack of Clarity Around Crypto Regulation

In a recent development, Coinbase, the popular cryptocurrency exchange, has been issued a Wells notice by the United States Securities and Exchange Commission (SEC), which typically precedes an enforcement action. The news prompted Coinbase CEO, Brian Armstrong, to criticize the SEC for its lack of clarity around crypto regulation. In a series of tweets, Armstrong compared the SEC to “soccer refs” in a game of pickleball, arguing that they could not agree on the rules of the “new game” of crypto regulation.

Armstrong’s criticism comes as the crypto industry faces ongoing debates around who should be the primary body regulating crypto, with the SEC being just one of many potential regulators. There has been concern among crypto companies that regulators lack a clear understanding of the industry and that their regulatory efforts may stifle innovation and drive activity offshore.

The reference to a “call they made back in April 2021” refers to the SEC’s approval of Coinbase’s application to go public. Armstrong argued that the company’s filings “clearly explained” its asset listing process and “included 57 references to staking.” However, the recent Wells notice suggests that the SEC has reversed its earlier position and is now seeking to take enforcement action against Coinbase.

Coinbase’s chief legal officer, Paul Grewal, also criticized the SEC’s lack of clarity around crypto regulation, claiming that the agency had provided “no clear rule book” and that “efforts to engage with the SEC are met with silence or enforcement actions.” Both Armstrong and Grewal appear to welcome the chance to use the “legal process” to provide the crypto industry with regulatory clarity and to defend Coinbase against the SEC’s enforcement action.

The news of the Wells notice has been widely condemned by the crypto community, with many agreeing that the SEC has reversed its earlier position regarding Coinbase. The community also seems to be throwing their support behind Coinbase, believing that the company will be fighting on behalf of the entire U.S. crypto industry as an unclear regulatory environment drives activity offshore.

In conclusion, the recent Wells notice issued to Coinbase by the SEC has sparked a debate around the lack of clarity and understanding among regulators when it comes to crypto regulation. Coinbase’s CEO and chief legal officer have criticized the SEC’s lack of clarity and seem to be welcoming the chance to use the legal process to provide the industry with regulatory clarity. The crypto community has widely condemned the notice, with many agreeing that the SEC has reversed its earlier position regarding Coinbase.


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US authorities are pursuing Bitzlato’s creator

The crypto company Bitzlato was the target of a “significant worldwide cryptocurrency enforcement operation” that was announced by the United States Department of Justice. The action also resulted in the arrest of the company’s creator, Anatoly Legkodymov.

Lisa Monaco, the Deputy Attorney General for the United States, made an announcement on January 18 stating that enforcement actions had been taken against Bizlato in coordination with France. These actions included the seizure of Bizlato’s website and the labelling of the company as a “primary money laundering concern” connected to Russian illicit finance.

According to Monaco, the United States Department of Justice, the United States Department of the Treasury, and French law enforcement collaborated to bring legal action against Bitzlato for allegedly “conducting a money transmitting business that transported and transmitted illicit funds and that failed to meet U.S. regulatory safeguards.” In other words, Bitzlato allegedly moved and transmitted illegal funds.

Legkodymov, a Russian citizen residing in China, was taken into custody by FBI agents on January 17 in Miami as part of the investigation into Bitzlato’s activities.

The United States District Court for the Southern District of Florida is where his arraignment is set to take place.

The United States authorities stated that the criminal complaint against Bitzlato was based on the company being a money laundering operation “crucial financial resource” for the Hydra darknet marketplace, which allowed users to launder funds, including those obtained from ransomware attacks: “Hydra Market users exchanged more than $700 million in cryptocurrency with Bitzlato, either directly or through intermediaries, until Hydra Market was shut down by U.S. and German law enforcement in April 2022.

Additionally, Bitzlato was given more than $15 million from the revenues of the malware.”

The enforcement action consisted of a concerted effort throughout Europe and the United States to confiscate a significant portion of Bitzlato’s resources, including as the company’s servers, as well as to take the company’s creator into custody.

The “most substantial enforcement endeavour” against an exchange since the National Cryptocurrency Enforcement Team was established in October 2021, according to Monaco, who referred to the case as “the most significant enforcement effort.”

It was stated by Assistant Attorney General Kenneth Polite of the criminal division of the Department of Justice that United States authorities were “just getting started” in their crackdown on similar businesses engaged in the facilitation of money laundering.

Monaco issued a warning to individuals who perpetrate crimes against the United States financial system “from a tropical island,” despite the fact that no official has explicitly commented on the current prosecution against cryptocurrency exchange FTX and its former CEO Sam Bankman-Fried.


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