SEC Questions FTX’s Crypto Repayment Plan

Key Takeaways

• The SEC expressed concerns about the legality of these repayments and whether they comply with federal securities laws.
• The SEC claimed that FTX’s repayment plan lacks details on who will manage the distribution of stablecoins

The U.S. Securities and Exchange Commission (SEC) is scrutinizing FTX’s proposal to repay its creditors using stablecoins or other crypto assets. In a court filing dated August 30, the SEC expressed concerns about the legality of these repayments and whether they comply with federal securities laws.

This development comes five months after a U.S. court mandated that FTX return $12.7 billion to its creditors and victims of fraud, following the imprisonment of its founder, Sam Bankman-Fried.

The SEC’s recent filing highlights potential legal issues with FTX’s plan to repay creditors in kind, particularly through cryptocurrency. Currently, the plan is to pay creditors in cash and U.S. dollar-pegged stablecoins, but the SEC wants to ensure these transactions do not violate securities laws.

The SEC filing stated, “The SEC is not opining as to the legality, under the federal securities laws, of the transactions outlined in the Plan,” and added that it “reserves its rights to challenge transactions involving crypto assets.” This indicates the regulator’s intent to intervene if it finds the repayment methods to breach securities regulations.

The SEC also pointed out that FTX’s repayment plan lacks details on who will manage the distribution of stablecoins, should these provisions be approved. Aligning with the U.S. Trustee overseeing the bankruptcy, the SEC opposes a discharge provision in the plan that would protect FTX’s debtors from any future legal claims by creditors. The U.S. Trustee argues that without removing this discharge protection, the court should not approve the bankruptcy plan.

FTX’s bankruptcy has incurred substantial costs, with administrative fees surpassing $800 million. Despite these high costs, FTX has presented a plan to repay 98% of its creditors, prioritizing those with claims of $50,000 or less. For other creditors, the plan includes full repayment plus 9% interest from the date of the bankruptcy filing.

Amid its bankruptcy proceedings, FTX has considered several strategies to enhance creditor recovery, including relaunching its exchange to generate funds. Despite some backing for these proposals, FTX’s leadership, led by CEO John Ray III, has dismissed the idea of restarting the platform, citing a lack of potential investors.

In August, FTX , which declared bankruptcy in November 2022, claimed an amended reorganization plan won overwhelming preliminary support from all sections of creditors entitled to vote. The crypto exchange estimated the total value that will be distributed to creditors will range anywhere between $14.5 and $16.3 billion.

As part of its efforts to pay off its bankruptcy debt, the exchange earlier stated that it will soon offload its stake in artificial intelligence firm Anthropic worth around $1 billion.