The SEC May Have Just Killed Tech Innovation in America

One of the great innovators in the free speech space just announced that it’s closing up shop because of government regulation. LBRY (pronounced “Library”) recently announced it will likely shut down in the near future after losing a lawsuit filed by the US Securities and Exchange Commission (SEC). This came just after the company caught the attention of Elon Musk because of Apple’s censorship of LBRY’s content in the App Store. But compared to Apple’s recently-revealed proclivities for free speech suppression, the SEC’s actions are far, far more dangerous.

LBRY is a decentralized blockchain content protocol that was developed by a company of the same name. This means that it is basically a public database of content, like movies, music, articles, etc., that no one person runs and that anyone can access or upload to. Imagine if websites like YouTube, or The Washington Post didn’t host or control their videos and articles themselves, but instead acted like a lens for viewers to look at content that was actually stored somewhere else where no one could touch it.

This is especially revolutionary because it means that content creators effectively can’t be censored. If you run a controversial channel on YouTube, you can be censored or demonetized at a moment’s notice and have your life’s work disappear in an instant. If you run a channel on Odysee (the YouTube alternative that runs on top of LBRY), however, they have no actual ability to delete your channel, remove your videos, get rid of your subscribers, or take the money that you earned.



The worst LBRY could do is hide your channel from the website, but it could easily be accessed like nothing happened on any other website that tapped into the same network (including the LBRY client, an open-source program you can run on your computer). This makes it perfect for posting controversial content such as conservative viewpoints or health freedom information. LBRY’s CEO and founder Jeremy Kauffman believes that the platform’s free speech element may have factored into it being singled out by the SEC:

“It's difficult to look at how the SEC has gone after us so voraciously while ignoring so many other companies without thinking politics have something to do with it. LBRY has helped keep up controversial content, such as 3D firearms, that is unpopular with government regulators.”

Let’s look at what the judge actually ruled in the LBRY case. He ruled that the LBRY company had engaged in an illegal securities offering when it sold the protocol’s token, LBC (short for “LBRY Credits”), to finance the company’s operations. First, he ruled that even though LBRY Inc. represented the LBC token as a purely consumptive (utilitarian) product for the running of the protocol in the overwhelming majority of its communications, it had communicated the investment potential of the token in some instances, which was enough to qualify the entire thing as a security.

He also ruled that the company (a startup building a radically new technology) did not have an initial business model outside of selling the token that it had accrued. And finally, even though he acknowledged significant consumptive use for the token today, the judge did not believe this was enough to discount the other two elements.

Here’s why this ruling doesn’t make sense:

First, after the initial writing of the code and the beginning token distribution, the LBRY company actually has no control over the technology, how it gets developed from there, or who runs the network and can acquire tokens. Second, the company purpose-built the tokens and the network they run on to work as efficiently as possible for hosting creators and their content, and did not offer any parameters that would make the token attractive as an investment.

It makes absolutely zero sense to consider tokens securities in a situation where the company can’t promise investors who else will have the tokens, where the technology will be developed from there, who will control it, or even what its purpose will be in the future, and certainly can’t guarantee improvement or that they will eventually be more valuable.

The worst part is, LBRY took proactive steps to remain legal and above-board. According to Kauffman, LBRY did everything possible to ensure full compliance and avoid this fate:

“LBRY hired outside counsel, Perkins Coie, and followed their instructions from day 1, well before the SEC was investigating. LBRY acted more conservatively than almost every other cryptocurrency company, even avoiding an ICO. LBRY also pro-actively sought a no action letter from the SEC and complied with voluntary requests for information and interviews.”

The effects of this case will reverberate far beyond LBRY. This ruling can have a chilling effect on cutting-edge tech entrepreneurship in the US. Radically new technology may take some forms that don’t resemble historical companies, and as such can’t be regulated the same way.

Our current securities laws are outdated and not effective in protecting investors, but beyond that, these laws can’t be applied to companies that don’t fit them, especially when this has the effect of dissuading inventors from pioneering the next generation of technology. If innovators have to be afraid of accidentally committing securities fraud and sinking their entire business every time they experiment with blockchain technology, they simply won’t innovate.

It’s important to note, though, that this chilling effect doesn’t actually mean that innovations such as LBRY don’t happen. It means that they still will happen, they just will be founded outside of the United States. Decentralized technologies can be both run, and accessed, from anywhere in the world, so entrepreneurs will either found their revolutionary companies and projects outside of the US, or they will simply reconsider, allowing a competing innovator in another country to implement the idea instead. Not only does this mean that regulations in this country do nothing to stem the tide of this technology’s growth, but they actually allow other counties to get ahead in the most rapidly-developing industry in the world.

As a result, all that capital created and earned by both founders and investors bypasses US citizens entirely, and Americans have reduced control and ownership over what is likely to be the financial and communications technology of tomorrow. Overregulation of the digital asset space is a threat to American innovation, prosperity, and even national security. Kauffman believes this exodus from the US is already taking place:

“Blockchain software engineering has already largely been pushed out of the US, and I imagine this will basically seal the deal. There's zero reason to launch a blockchain as an American company, and a lot of reasons not to. Hopefully Congress will act before it's too late, which unfortunately means little hope.”

America was founded as a scrappy but innovative startup of a nation enshrined in free speech, free markets, and free spirits. This formula took 13 former colonies from rebel upstarts to the all-time pinnacle of human civilization in just a couple hundred years. Needless government suppression of its best and brightest like LBRY, however, threatens to make America great no more.
 


 

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