The tortoise and the hare of digital finance
Web3 gaming may very well be the beating core of a Web3 future but game developers may have to pay attention to the developing blockchain regulatory landscape, even if only because of their use of blockchain technology.
If Web3 is the next evolutionary stage for gaming, then there are certainly lessons to take from crypto being the next evolutionary stage for money.
The ongoing debate about regulating crypto is getting some practical implications this winter. Even though broad regulators such as the EU and US have been talking for years about setting out new laws in place and regulating crypto, consequences were mostly theoretical in nature.
From the beginning of the fourth industrial revolution, we kind of got a feeling that the race between law and technology resembled the fable from Aesop. The rapidly expanding field of information technology had the speed to outrace regulators anytime and leave them wondering how to keep up with such innovative changes.
Nevertheless, in the story, the slower tortoise wins the race against the bragging hare.
It may be still too early to discuss whether the US Securities and Exchange Commission (SEC) is the tortoise in this story or not, but the harsh truth is here — the regulators have finally decided to step up and pull out the big guns.
The last two years have been tough for the crypto industry in the United States since the SEC decided to hustle on through a number of charges. From Braga and LBRY to Ripple and Shavers, the American watchdog managed to start many cases in relation to crypto assets and investor protection. The list just goes on and on.
Even Kim Kardashian and Floyd Mayweather got hit by the SEC for not priorly disclosing that they wanted to promote crypto assets on the Internet. While it may be obvious that the regulators decided to toughen up their big boss positions, this is something we should have seen coming from the point in time when crypto started to experience massive adoption.
So what should a Web3 gaming company pay attention to when looking at cases like this? Would they be next in line if game NFTs or even staking guilds begin to look like securities or get promoted by influencers? Let’s look through facts and the whole background before discussing the issue in question.
The case of SEC v. LBRY: Crypto fought the law… Did it lose?
In the first week of November 2022, a US District Court’s judge for the District of New Hampshire granted the Commission’s motion for summary judgement against a New Hampshire software company known as LBRY Inc. The court held that the crypto start-up violated securities laws by sellings its native LBC tokens without registering with the SEC, and that LBRY did not have a valid defence to successfully fight the complaint.
The crypto company operates a digital content network that uses LBRY Credit (LBC tokens) to reward users for performing tasks, contributing to projects, referring new users, publishing related content and others. Native tokens can also be purchased or mined.
The proceedings started back in March 2021 when the SEC sued LBRY claiming that its native tokens were securities and that the company did not bother to register them. The complaint in question alleged that from July 2016 to February 2021 the sued company sold crypto asset securities, namely LBRY credits, to a bunch of investors without filing a registration statement for the offering, and received approximately $12 million in dollars and crypto assets. LBRY fought back saying that their LBC tokens were not securities, and that they were not given fair notice by the Commission that the sale of tokens was even subject to securities law.
LBRY argued rapidly that its native tokens were not intended to be used for investment purposes at all, yet only encompassed a use related to the LBRY blockchain. The main objective of such defence was to prove that LBC Credits functioned as a commodity rather than a security. A successfully executed commodity defence could have dismissed such a motion and become a crypto-friendly precedent in the U.S. legal tradition. LBRY added to its defence strategy that it was not given fair notice by the SEC, but the Court pulled out the fact that the crypto start-up failed to familiarise itself with the Howey test, namely a longstanding standard for defining a security.
The crypto community didn’t take this judgement lightly. Due to the legal system based on precedents used in Anglo Saxon countries, it is obvious why such judgments cannot be taken as they come. That is why the company’s founder stated that this case could have sweeping implications for the wider crypto industry since the SEC finally got its precedent.
It is now to be seen how the LBRY ruling is going to affect the similar case of SEC v. Ripple Labs in which the defendant claimed that its native token XRP is not a security and that the Commission failed to provide fair notice to the company that its conduct was unlawful.
The dark cloud of legal uncertainty
Major players in the crypto industry such as Coinbase and others have filed briefs in support of these two companies. The support didn’t come from the fact that crypto companies should do as they like, yet from the premise that the securities laws have been applied by the regulator inconsistently and created legal uncertainty within the whole industry. The guidance issued in April 2022 should have been presented long before. The question of whether the SEC can harm crypto is still to be determined in the long run and through subsequent case law.
For Web3 gaming, the question is… is it true that the consequences of the LBRY case and others could lead to declaring every cryptocurrency as a security? And if so, would game NFTs and Web3 game tokens also then be considered as securities, if they are first classified as cryptocurrency?
If we imagine the SEC being our tortoise from the story, we may see that the winning strategy was set on the premise of using existing regulations and standards to catch up with the hare.
Those who would call themselves blockchain gaming developers shouldn’t shy away from the question. If we agree that crypto should not be used contrary to existing legal regulations and to harm investors in any way, and that the cryptocurrency and blockchain industry should be known for its positive effects on the community rather than contravening law, then we must be ready to comply.
However, as a novel industry branch, the crypto community – including Web3 gaming – needs clear-cut guidelines from regulators and a high degree of legal certainty as well.
We shall see if this is forthcoming.