The Securities and Exchange Commission (SEC) has indicated that it may challenge the FTX bankruptcy estate's proposal to pay creditors in stablecoin. This development comes as FTX seeks to repay its creditors, many of whom are still reeling from the aftermath of the exchange's collapse in November 2022, which left an $8 billion deficit.

However, creditors are concerned that this move by the SEC could complicate the ongoing restructuring process of the collapsed cryptocurrency exchange. 

Here's the breakdown of the key points:

  • SEC may challenge FTX's plan to repay creditors in stablecoins.
  • FTX's $8 billion bankruptcy plan aims to repay creditors up to 118% in cash.
  • SEC reserves the right to oppose crypto asset transactions in the FTX case.
  • Creditors criticize the plan, arguing it may not serve their interests.
  • SEC's stance draws criticism for complicating the bankruptcy process.

In a court filing made on September 1, 2024, the SEC expressed its concerns regarding the proposed payment plan, which includes the distribution of U.S. dollar-pegged stablecoins.

The SEC's motion stated, “The SEC is not opining on the legality, under the federal securities laws, of the transactions outlined in the Plan and reserves its rights to challenge transactions involving crypto assets”. This statement underscores the regulatory body's cautious stance towards the use of stablecoins in the repayment process.

FTX's bankruptcy administrators had previously proposed a plan that would allow 98% of creditors to receive 118% of their claims in cash or stablecoins within 60 days of court approval. However, this plan has drawn criticism from certain creditor groups who argue that receiving payments in fiat could lead to tax liabilities, complicating their financial recovery.

According to critics, the SEC's intervention is not unprecedented; it mirrors its approach in other high-profile bankruptcy cases, such as Voyager Digital. They also noted that the SEC's vague objections regarding the use of stablecoins in bankruptcy proceedings tend to stall the resolution process.

Adding to the discourse, Alex Thorn, head of research at Galaxy Digital, took to X to voice his frustration with the SEC's stance, labeling it as “the height of jurisdictional overreach.” Thorn emphasized that the SEC's actions appear to be an unwarranted attempt to exert control over the distribution of stablecoins, which he believes are legitimate financial instruments.

The SEC's filing also raised concerns about the lack of clarity regarding the distribution agent for the stablecoins, stating, “The Debtors have not identified the distribution agent, which may potentially distribute stablecoins to creditors under the Plan”. This ambiguity has further fueled skepticism about the feasibility of the proposed payment plan.

In light of these developments, the FTX bankruptcy estate is now faced with the challenge of navigating the regulatory landscape while attempting to fulfill its obligations to creditors. The SEC's insistence on clarity and compliance with federal securities laws could lead to significant delays in the bankruptcy process.

The implications of this situation extend beyond FTX, as it raises broader questions about the regulatory treatment of stablecoins and other digital assets within the U.S. financial system. As the SEC continues to assert its authority over cryptocurrency transactions, industry observers are left to ponder the future of digital assets in bankruptcy proceedings.

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