Parts of S7-04-23 Safeguarding Advisory Client Assets are directly affected by the following facts. Please consider how. The LBRY settlement is a picture-perfect example of how not to regulate, and should be considered a national scandal. Think about the custody. With commissioner Hester Pierce's statement today, I feel that I should finally weigh in on this one, to make clear just how wildly egregious the conduct of the SEC was in this case. To refresh people on the facts, LBRY is a decentralized file-sharing platform, intended for that purpose. There's no deception here, and while there are possible arguments that file-sharing itself is a problem, none of those are specifically relevant to the SEC's case. Instead, the SEC had a problem with a token. To quote directly from Commissioner Pierce's statement: "One does not have to dig deep to find fraudulent crypto projects that sold tokens with promises that they did nothing to fulfill. This sad reality makes the Commission’s decision to bring a case against LBRY especially puzzling. LBRY’s approach was more conservative than the approach many other projects took. Here, the blockchain was up and running at the time most tokens were sold, and the Commission’s complaint did not allege, and the court did not find, evidence of fraud. LBRY built a blockchain to facilitate data sharing, afford greater control to content creators, and make censorship more difficult. LBRY created a popular platform on the blockchain for sharing videos and other media. The open-source LBRY blockchain was available for anyone else to use. Why go after a company that sold a token for a functioning blockchain with an established use when we could have pursued plenty of other projects that were outright frauds and did not attempt to comply with the securities laws? To make matters worse, the Commission took an extremely hardline approach in this case. For example, after winning on summary judgment, the Commission sought monetary remedies of $44 million and asserted that LBRY’s offer to burn all tokens in its possession was not sufficient assurance that LBRY would not violate the registration provisions in the future. The Commission’s requested remedies were entirely out of proportion to any harm. Indeed, the court stated during the remedies hearing that “the absence of fraud allegations, [and] the fact that there was some measure of uncertainty” regarding the application of the securities laws when LBRY commenced its offering were facts that “should be taken into account when considering a penalty.” After the remedies hearing, the Commission pared its penalty request back to a significantly lower $111,614, which the court approved." Footnotes removed by me. What this means is that the SEC was primarily angry that LRBY did not register as a security and dared to use a blockchain and distribute tokens. In short, the sin here was not following some paperwork rules that don't work for blockchains because the SEC refuses to make rules for blockchains and instead oppose the technology, any innovation away from SEC-centralized control of securities markets, an especially oppose those who dare to not pay the gangsters at the SEC their protection money. Here's the larger text: Statement Overdue: Statement of Dissent on LBRY Hester Peirce Commissioner Hester M. Peirce Oct. 27, 2023 The Commission has brought many troubling crypto enforcement actions, but the LBRY, Inc. (“LBRY”) case has especially unsettled me. A statement on the case is overdue. I did not support bringing the case, but have been unable to speak publicly about my concerns while the case has been in litigation. Last week, after losing in federal district court on the question of whether the sale of LBRY tokens was an unregistered securities offering, LBRY announced that it will not move forward with an appeal of the decision.[1] Instead, the company will shut down and its assets will be placed in receivership and used to satisfy its debts, including the civil money penalty owed to the Commission.[2] Are investors and the market really better off now after the Commission’s litigation contributed to the demise of a company that had built a functioning blockchain with a real-world application running on top of it? This case illustrates the arbitrariness and real-life consequences of the Commission’s misguided enforcement-driven approach to crypto. One does not have to dig deep to find fraudulent crypto projects that sold tokens with promises that they did nothing to fulfill. This sad reality makes the Commission’s decision to bring a case against LBRY especially puzzling. LBRY’s approach was more conservative than the approach many other projects took.[3]Here, the blockchain was up and running at the time most tokens were sold, and the Commission’s complaint did not allege, and the court did not find, evidence of fraud. LBRY built a blockchain to facilitate data sharing, afford greater control to content creators, and make censorship more difficult. LBRY created a popular platform on the blockchain for sharing videos and other media.[4] The open-source LBRY blockchain was available for anyone else to use.[5] Why go after a company that sold a token for a functioning blockchain with an established use when we could have pursued plenty of other projects that were outright frauds and did not attempt to comply with the securities laws? To make matters worse, the Commission took an extremely hardline approach in this case. For example, after winning on summary judgment, the Commission sought monetary remedies of $44 million and asserted that LBRY’s offer to burn all tokens in its possession was not sufficient assurance that LBRY would not violate the registration provisions in the future.[6] The Commission’s requested remedies were entirely out of proportion to any harm. Indeed, the court stated during the remedies hearing that “the absence of fraud allegations, [and] the fact that there was some measure of uncertainty” regarding the application of the securities laws when LBRY commenced its offering were facts that “should be taken into account when considering a penalty.”[7] After the remedies hearing, the Commission pared its penalty request back to a significantly lower $111,614, which the court approved.[8] The application of the securities laws to token projects is not clear, despite the Commission’s continuous protestations to the contrary. There is no path for a company like LBRY to come in and register its functional token offering.[9] Even if a company did manage to register its token offering, it would not be a particularly useful effort. Compliance with the securities laws is important because we want to ensure that people buying securities receive accurate and reliable information so they can assess the risks and rewards of an investment. Here, LBRY made significant disclosures outside of the registration process—disclosures that the Commission did not allege were fraudulent or misleading—and there is little to indicate that LBRY’s disclosures did not provide token purchasers with information adequate to assess whether the tokens were a good fit for them.[10] The time and resources we expended on this case could have been devoted to building a workable regulatory framework that companies like LBRY could have followed. Then the market could have decided LBRY’s fate. Even if, as the judge ruled here, the offering of tokens should have been registered, our scorched earth approach in remedying the violation was completely out of proportion to any investor harm. How does the result in this case protect LBRY investors, who likely would have preferred that the company continue to exist to support the blockchain, which is still in its infancy? The judge did not rule on whether the token itself was a security or on the status of secondary sales of LBRY tokens,[11] which means that the LBRY blockchain may live on, but its path forward is difficult. The Commission’s action forced a group of entrepreneurs to abandon what they built. Our disproportionate reaction in this case will dissuade people from experimenting with blockchain technology, which LBRY aptly describes as “technology that enables dissent.”[12] A government of a free people should welcome dissent and the technologies that enable it. Earlier this year, LBRY tweeted: “It’s the year 2028, hundreds of thousands of Americans have been jailed for using illegally cryptocurrency instead of CBDCs, and Hester Pierce [sic] is still just writing dissenting memos.”[13] Although I will be tending bees, not writing dissents, in 2028, I think often about the crux of that criticism and ask myself: “What could I do to help prevent another group of people with a big idea for changing the world from going through what LBRY has over the past several years?” I have not come up with an answer to that question; however, I urge people who have suggestions about how the Commission can right its course on crypto and innovation more broadly, to send them my way.[14] [1] The End of LBRY, Oct. 19, 2023, https://odysee.com/@lbry:3f/theendoflbryinc:d?fbclid=IwAR1bBr_IiP-iP9F3hapkGWcn0D0rOpMG9B8mxN2L73DkJDA77B24uNGt52I. [2]Id. (“LBRY must die, there is no escaping this. It has lost a judgment to the federal government, has several million dollars in debts, and has pledged to shut down.”). [3] See, e.g., DAO Today with Alexa Mil Podcast (Dec. 27, 2022), at approximately minute 12 (comments of Jonathan Schmalfeld) (“Lots of people looked at LBRY as doing things the right way. They weren’t doing the ICO. When they released the fully developed platform. The tokens were consumptive. There was an actual use for them on release date. They did a traditional investment raise. They brought on shareholders. They used securities and venture investing. And they didn’t sell tokens as part of that. There wasn’t any kind of pre-token rounds as part of that. And then they waited a year until after the platform was actually working and functional and there was a good amount of videos on there.”). [4]See Odysee, https://help.odysee.tv/category-basics/whatisodysee/ (last visited Oct. 24, 2023). LBRY subsequently transferred this platform to its Odysee subsidiary. [5] See LBRY, https://lbry.com/faq/what-is-lbry (last visited Oct. 24, 2023) (describing the LBRY protocol). As the district court noted when it granted summary judgment to the Commission, it was “generally uncontested” that “(1) LBC is a utility token designed for use on the LBRY Blockchain, and (2) some unknown number of purchasers of LBC acquired it at least in part with the intention of using it rather than holding it as an investment.” SEC v. LBRY, Inc., 639 F.Supp.3d 211, 220 (D.N.H. 2022). [6] Commission’s Opposition to LBRY’s Motion to Limit the Commission’s Remedies at 9-11, 13-15, SEC v. LBRY, Inc., No. 21-cv-260 (D.N.H. Dec. 19, 2022), ECF No.94 (requesting $22 million in disgorgement and a $22 million civil money penalty). [7]Transcript of Motions Hearing Before the Honorable Paul J. Barbadoro at 50, SEC v. LBRY, Inc., No. 21-cv-260 (D.N.H. Jan. 30, 2023), ECF No. 105; see also id. at 17 (“Let’s be fair here. You are not alleging that LBRY engaged in any fraudulent activity, first. Second, although I held that LBRY had fair notice sufficient to allow for the enforcement of the Securities Act against it for those offerings, the fact of the matter is that this was one of the first non-fraud cases that did not involve an initial coin offering . . .”); and id. at 51 (“You have to go back to the time this action was filed. This was relatively early on in the development of the SEC’s position with respect to crypto offerings . . .”). [8]Commission’s Supplemental Brief on Remedies at 3-4, SEC v. LBRY, Inc., No. 21-cv-260 (D.N.H. May 12, 2023), ECF No. 107 (requesting a $111,614 civil money penalty and withdrawing the request for disgorgement); SEC v. LBRY, Inc., 2023 WL 4459290 *5 (D.N.H. July 11, 2023) (imposing $111,614 civil money penalty). [9] See, e.g., Rodrigo Seira, Justin Slaughter, and Katie Biber, The Current SEC Disclosure Framework Is Unfit for Crypto (Apr. 20, 2023), https://policy.paradigm.xyz/writing/secs-path-to-registration-part-iii (“As we have shown above, the current securities framework was tailor-made to regulate fundraising by centralized legal entities issuing securities, such as a company selling shares to the public in its ‘IPO.’ However, crypto assets differ fundamentally from securities and therefore raise different investor disclosure considerations.”). [10]See, e.g., Coinbase, Re: Petition for Rulemaking – Digital Asset Securities Regulation at 5-6 (Jul. 21, 2022), https://www.sec.gov/rules/petitions/2022/petn4-789.pdf (“The SEC disclosure regime has historically focused on ensuring that investors have material information necessary to make an informed investment decision. Current disclosure requirements, however, do not cover a number of features unique to digital assets that would undoubtedly be considered important when making an investment decision. For example, investors would likely find information about the risk of a network attack, what kind of governance rights are embedded in which tokens, who has the ability to change the code underlying the assets or the network, and other features that do not exist with respect to traditional securities to be material. Additionally, investors would benefit from comparable disclosures across each digital asset security to assist in identifying differences among investment opportunities.”). [11]SEC v. LBRY, Inc., 2023 WL 4459290, *3 (D.N.H. July 11, 2023). [12] The End of LBRY, Oct. 19, 2023, https://odysee.com/@lbry:3f/theendoflbryinc:d?fbclid=IwAR1bBr_IiP-iP9F3hapkGWcn0D0rOpMG9B8mxN2L73DkJDA77B24uNGt52I. [13]LBRY Inc, LLC (@LBRYcom), X (Feb. 9, 2023, 4:39 PM), https://twitter.com/LBRYcom/status/1623798813881163778. Public blockchains eliminate the need for reliance on a central intermediary, which makes censoring information stored on a blockchain more difficult. [14]Email suggestions to CommissionerPeirce@sec.gov. Why do I say that last line? Let's look at how the SEC protected investors in this case. They: 1 - Destroyed a functioning business, which is now bankrupt and shutting down. 2 - Grievously damaged the investors, who will not recover their funds in bankruptcy thanks to the fatal actions not of the market, not of the company, and not of the customers, but rather only the SEC. 3 - Wiped out the LBRY token holders, as now those tokens have no value. 4 - Will attempt to collect on a settlement that will expropriate all of those people while being used to pay the salaries of the very SEC bureaucrats that destroyed the whole thing. This is the equivalent of a SWAT team showing up at the house of an innocent person, throwing out all the occupants, burning the house down, and then auctioning off the remains at a huge discount and keeping the proceeds because of the cost of the "fire response" from the fire they themselves started. Do you know who actually behaves this way? Organized criminal gangs. This is a protection racket, and the mafia is probably silently applauding the audacity of the SEC here to destroy a project and then make the project pay them for being destroyed to set an example for others about the folly of standing up to petty bureaucrats. I am, in general, in favor of positive regulations, but this is completely insane and an affront to the dignity of Americans and all investors. We should not tolerate this, and the only just response to this conduct should be to terminate every single person involved at the SEC and the leadership who greenlit this, or failing that, zero the entire budget for the SEC and start over if this is their idea of capital formation and investor protection. These point to violations of the APA in regards to S7-04-23, this rule.