SEC Faces Scrutiny Over FTX Bankruptcy Repayment Plans

The Securities and Exchange Commission (SEC) is facing scrutiny for its recent filing on the FTX bankruptcy, similar to its approach in the Voyager case.

In a recent filing, the SEC warned the FTX estate that it may oppose plans to repay creditors with stablecoins or other digital assets, citing potential legal concerns. This suggests that the SEC could challenge FTX’s current plan to repay creditors in cash or U.S. dollar-pegged stablecoins, despite the agency’s objections regarding a provision to protect FTX from future legal liabilities.

James Murphy, an attorney and strategic advisor, commented on September 2 that the Voyager bankruptcy of 2022 and the SEC’s repeated tactic of being vague on crypto transactions and clarity, which critics argue stalls the bankruptcy process.

The SEC tried this same exact hide-the-ball tactic in the Voyager bankruptcy; and the Judge there appropriately rejected the ploy.

In the case of Voyager’s bankruptcy, the company filed for Chapter 11 bankruptcy in July of 2022 after experiencing significant financial distress, largely due to the collapse of its major debtor, Three Arrows Capital.

The SEC was closely involved in monitoring Voyager’s plans to repay customers using stablecoins, expressing concerns that these repayments could be considered unregistered securities. This complicated the bankruptcy resolution and caused delays and legal challenges. During this process, a judge rebuked the SEC for its vague objections about stablecoins, per Murphy, insisting that regulators should clearly state their concerns if they have any.

The SEC’s latest filing in the FTX case warns that it may, yet again, challenge the legality of repaying creditors in stablecoins or other digital assets. However, the agency stops short of declaring such actions illegal, reserving the right to object in the future. This repeated lack of clarity has drawn ire from industry observers who believe it undermines the SEC’s mission to protect investors.

The SEC didn’t outright state that such an action would be illegal, writing, “The SEC is not opining as to the legality, under the federal securities laws, of the transactions outlined in the Plan,” but notes that the agency, “…reserves its rights to challenge transactions.”

“Investors, consumers and markets deserve better. Way better,” tweeted Paul Grewal, Chief Legal Officer at Coinbase, in response to the lack of transparency. Critics argue that the SEC’s approach introduces additional uncertainty to an already complex bankruptcy, leading some to question whether this strategy truly serves the interests of investors or if it simply prolongs the entire bankruptcy process.

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