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HomeNewsFTX Creditors Could Face Delays as SEC Probes Repayment Plan

FTX Creditors Could Face Delays as SEC Probes Repayment Plan

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  • The SEC has expressed great concern over using stablecoins pegged to the US dollar to repay creditors by the defunct crypto exchange FTX.
  • The SEC maintained that even though using stablecoins to repay creditors might not be technically illegal, they had the right to dispute payments made with crypto assets pegged to the US dollar.

The U.S. Securities and Exchange Commission has raised concerns over the repayment plan proposed by the bankrupt cryptocurrency exchange FTX. The use of stablecoins in the repayment plan could pose legal risks for FTX and, therefore, lead to delayed repayments. 

These concerns were raised via a filing with the United States Bankruptcy Court in Delaware on August 30. The U.S. watchdogs questioned the legality and regulation of the defunct crypto exchange FTX intends to use for repayment, especially stablecoins.

According to the SEC lawyers, while the use of stablecoins to repay creditors may not be technically wrong, the SEC maintained the option to contest repayments made with crypto assets denominated in US dollars.

Backtracking, FTX, once a dominant force in the cryptocurrency market, filed for Chapter 11 bankruptcy in late 2022. The downfall of such a cryptocurrency titan sent shockwaves through the cryptocurrency landscape.  As part of its bankruptcy proceedings, FTX has proposed a Chapter 11 Plan that includes the distribution of stablecoins to certain creditors. 

Although the SEC has not officially declared the proposed transactions illegal, it has emphasized its authority to challenge these transactions under U.S. securities laws. The agency’s filing states:

The Debtors’ portfolio includes crypto asset securities which the Debtors may seek to monetize and/or distribute pursuant to the Plan. And, the Debtors are exploring different distribution options, including potentially distributing stablecoins to certain creditors. 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.

Taking a firm stance on cryptocurrencies, the SEC is prepared to object to FTX’s repayment plan if it deems right that the distribution of the stablecoins is contrary to their federal securities law. Additionally, the SEC has demanded that FTX remove a discharge provision from the Plan, the proposed confirmation order, and other specific amendments.

This stance from the SEC hasn’t gone unnoticed. More often than not, the SEC’s harsh posture on cryptocurrency has been tagged as far-fetching and unnecessary. One Alex Thorn, head of research at Galaxy Digital, criticized the SEC via the X platform. According to Alex, the agency’s stance exemplifies “jurisdictional overreach.”

Backing his insights, Thorn pointed out that the SEC had recently cut back its regulatory pressure against several stable coin operators, which makes its current scrutiny contradictory. 

Alex Stated:

The SEC is again reserving the right to claim dollar-backed stablecoins are ‘crypto asset securities,’ despite dropping their enforcement against Paxos and losing their MTD on BUSD against Binance in July. This is the height of jurisdictional overreach.

Terming the SEC’s letter as “absurd,” he argued that most regulators do not view stablecoins as securities. He suggested that the SEC’s actions are more about maintaining control over the crypto industry than protecting crypto investors.

 

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