The Complexity of Secondary Market Securities and the Case of Ripple and LBRY Credits

In a recent development that has attracted much attention from the global crypto community, the United States District Court has declined to categorically classify the secondary sale of LBRY Credits (LBC) as a security. This non-committal stance from Judge Paul Barbadoro of the U.S. District Court for the District of New Hampshire has triggered widespread debate and speculation about the potential implications for the cryptocurrency Ripple, which faces a similar lawsuit brought by the United States Securities and Exchange Commission.

The Conundrum of Defining Secondary Market Securities

Barbadoro’s ruling didn’t unequivocally address whether the secondary sale of LBC could be considered a security. This decision may set the stage for future decisions in comparable cases, including the impending judgment in the SEC’s litigation against Ripple. Judge Analisa Torres, responsible for adjudicating the Ripple case, may find the precedent set by Barbadoro’s non-committal stance instrumental.

In his statement, Barbadoro articulated, “I am not in a position to rule if the registration requirement applies to secondary market offerings of LBC.” This statement leaves the matter open to interpretation, paving the way for ongoing discourse around what constitutes a security in the secondary market.

Drawing Lines: Primary and Secondary Market Securities

Understanding the distinction between primary and secondary market securities is crucial to grasp the nuances of this case. The primary market refers to the original issuance of securities directly from a company. 

In contrast, the secondary market encompasses trading these securities among investors post-initial issuance.

John Deaton, a U.S. attorney representing numerous XRP token holders, publicly sought to gain clarity on the LBC’s classification as a security. However, Judge Barbadoro elected to exercise “judicial restraint,” leaving Deaton and the larger crypto community in the dark.

A Shift in Judicial Perspective

Barbadoro’s recent standpoint represents a significant shift from his earlier judgment. During an appeal hearing in January, Deaton had successfully convinced Barbadoro that secondary sales of LBC should not be classified as securities offerings. In that hearing, the judge clarified that LBC would only be considered a security if the sale was executed directly.

Remarkably, even the SEC admitted in that hearing that secondary market sales of LBC did not necessarily equate to securities. Despite securing a summary judgment in its favor in November 2022, the SEC settled for a $22 million fine during the appeal hearing on January 30.

SEC’s Change of Course

Adding another layer to the unfolding saga, the SEC revised the settlement amount in May. The regulatory body requested the court to impose a reduced fine of $111,000, justifying the significant reduction by citing LBRY’s dwindling funds and “near-defunct” status.

As the discourse around secondary market securities continues to evolve, the ambiguity surrounding Barbadoro’s decision could have far-reaching effects on the broader cryptocurrency market and future securities litigation. That may heavily influence the pending Ripple case with the SEC. 

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