The United States Securities and Exchange Commission (SEC) has raised concerns over the proposed repayment strategy of the defunct cryptocurrency exchange, FTX. The SEC has indicated it may contest plans that involve using stablecoins to reimburse creditors.
SEC’s Warning on Repayment Plans
In a court filing dated August 30, submitted to the U.S. Bankruptcy Court in Delaware, SEC attorneys clarified that while repaying creditors with stablecoins isn’t explicitly unlawful, the agency retains the right to challenge such transactions. This is particularly relevant if the repayment involves US-dollar pegged crypto assets.
This development occurs as FTX is actively searching for ways to compensate its creditors following the exchange’s significant collapse in November 2022.
FTX’s Strategy for Creditor Compensation
FTX is weighing various options to reimburse creditors, including previously considered plans to revive the exchange. The newest proposal outlines a strategy centered on liquidating assets and using their U.S. dollar value at the time of bankruptcy for settling claims.
Under this arrangement, creditors would receive payment in either cash or stablecoins. The SEC specified in its filing that it is not opining on the legality of these transactions under federal securities laws, yet it reserves the right to contest any dealings involving crypto assets.
Additionally, the SEC pointed out that the proposed repayment plan lacks a designated “distribution agent”—a crucial role that would ensure proper management of fund distribution to creditors, regardless of the medium of payment.
Criticism from the Crypto Community
The SEC’s position has drawn criticism from influential voices within the cryptocurrency sector. Notably, Alex Thorn, head of research at Galaxy Digital, and Paul Grewal, the chief legal officer at Coinbase, have spoken out against the regulator’s actions.
Thorn has labeled the SEC’s stance as an example of “jurisdictional overreach,” especially following the agency’s decision to drop its case against the issuer of Binance USD (BUSD), Paxos, in July. He expressed concerns that despite previously ending enforcement against Paxos, the SEC is now attempting to categorize dollar-backed stablecoins as “crypto asset securities,” which he termed as absurd.
Similarly, Grewal argued that the SEC’s threatening behavior creates instability and uncertainty in the cryptocurrency market.
Increased Scrutiny on the SEC
Meanwhile, the SEC is under intensified scrutiny for its regulatory approach to the crypto industry, which many have labeled as “regulation-by-enforcement.” Critics contend that the SEC has not established a coherent regulatory framework for cryptocurrencies but has instead opted to pursue legal actions against significant players in the industry.
In a recent report, it was noted that a coalition of seven U.S. states, spearheaded by Iowa Attorney General Brenna Bird, has initiated a challenge against the SEC’s regulation of cryptocurrencies. This coalition argues that the SEC’s regulatory actions represent a “power grab” that could hinder innovation and exceed the agency’s legitimate authority.
The coalition comprises states including Arkansas, Indiana, Kansas, Montana, and Nebraska, with Oklahoma recently joining the effort. Earlier this year, SEC Commissioner Hester Peirce also remarked that the agency appears to be operating in an “enforcement-only mode” regarding cryptocurrency regulations.