The United States Securities and Exchange Commission (SEC) has expressed concerns about FTX’s proposed plan to repay creditors using stablecoins, according to an August 30 court filing in the United States Bankruptcy Court in Delaware. The warning suggests potential regulatory challenges ahead as the defunct crypto exchange navigates its bankruptcy proceedings.
FTX, once a leading name in the cryptocurrency exchange sector, faced a sudden downfall in November 2022, leading to its bankruptcy. Since then, the platform has explored various strategies for compensating its creditors, including initially considering relaunching the exchange.
Repayment Plan Controversies
Currently, FTX has proposed a liquidation plan that includes repaying creditors based on the U.S. dollar value of their holdings at the time of the bankruptcy. This repayment could be made either in cash or using stablecoins. However, the SEC has not fully endorsed this approach, particularly the use of stablecoins for repayment, stating:
“The SEC is not opining as to the legality, under the federal securities laws, of the transactions outlined in the Plan and reserves its rights to challenge transactions involving crypto assets.”
The SEC’s cautious stance stems from concerns about the legal status of stablecoins and their classification as securities. The filing highlights the absence of a designated “distribution agent” to handle the repayment process, whether in cash or stablecoins, adding another layer of complexity to the proceedings.
Crypto industry leaders have reacted strongly to the SEC’s comments. Alex Thorn of Galaxy Digital criticized the regulator for what he sees as an overreach of its jurisdictional authority. Meanwhile, Paul Grewal, Coinbase’s chief legal officer, condemned the SEC’s approach as counterproductive, arguing that it prefers to leverage threats rather than providing market clarity.
The Debate Over Stablecoins
This controversy comes in the backdrop of ongoing debates about the nature and regulatory treatment of stablecoins. In July, the SEC dropped a notable case against Binance USD (BUSD) issuer Paxos, which had implications for how dollar-backed stablecoins are perceived under U.S. securities law.
If the SEC decides to challenge the repayment plan, it could set a significant precedent for how crypto bankruptcies are handled in the future, particularly regarding the use of stablecoins in repayment strategies. The decision could also influence the broader regulatory landscape for digital assets in the U.S.
As FTX strives to resolve its bankruptcy and compensate its creditors, the SEC’s scrutiny indicates a critical juncture for regulatory engagement with the cryptocurrency industry. How this situation unfolds will likely have far-reaching implications for the governance and operational standards of crypto businesses in the U.S.
