SEC Throws Wrench in FTX’s Stablecoin Repayment Plan, Faces Backlash

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The US SEC warned it may take legal action against the defunct exchange FTX if it attempts to reimburse its creditors using stablecoins.

While using stablecoins for creditor repayments is not illegal, the SEC can dispute this plan, the regulator stated in a court filing.

FTX’s $12.7B Repayment Plan

The infamous FTX collapse in November 2022 has become one of the largest scams in crypto history. In early August, a New York judge ruled that FTX must repay $12.7B to its creditors.

Initially, FTX proposed to return its victims 118% of their lost funds based on their value in US dollars at the time of the exchange’s bankruptcy filing.

However, some creditors sought payouts in crypto in-kind, factoring in the market’s substantial market cap increase.

Yet, bankruptcy laws require FTX to value claims at the time of Chapter 11 filing, and the court is not obliged to approve creditors’ requests.

SEC Challenges FTX Plan, Faces Backlash

Despite creditors’ call for in-kind crypto repayments, FTX’s latest liquidation plan suggests repaying creditors in US dollars or stablecoins.

The regulator also noted that FTX hasn’t chosen a ‘distribution agent’ – a company that would oversee the repayment process.

Alex Thorn at Galaxy Digital criticized the SEC for overreaching its authority. He pointed out that the SEC continues to claim stablecoins should be classified as crypto asset securities despite dropping the Paxos case in July.

Closing Remarks

The SEC maintains a harsh stance on stablecoins, viewing them as crypto asset securities. Despite dropping its case against Paxos, the regulator continues to threaten legal action against FTX for using stablecoins to repay creditors.

Regardless of the outcome, this case may call for reforms to bankruptcy laws to better accommodate crypto firms.

References

• FTX seeks creditor votes on bankruptcy wind-down payments (Reuters)
• Alex Thorn (X)
• Paxos Prevails in SEC Investigation of BUSD Stablecoin and SEC Will Not Pursue Enforcement Action (Paxos)
• Case 22-11068-JTD Doc 2438 (Kroll)