The United States Securities and Exchange Commission (SEC) has expressed reservations regarding the repayment strategy proposed by the bankrupt crypto exchange FTX, indicating potential legal challenges if the plan involves the distribution of stablecoins to creditors. The SEC’s concerns were documented in a filing with the United States Bankruptcy Court in Delaware dated August 30, which outlines the regulatory body’s stance on the legality and oversight of crypto assets used in the repayment plan.

SEC May Dispute The FTX Plan To Reimburse Investors

FTX, once a leading figure in the cryptocurrency exchange market, filed for Chapter 11 bankruptcy in late 2022, following a rapid collapse that shook the crypto world. The filing on Wednesday reveals the SEC’s hostile approach toward the distribution methods proposed in FTX’s Chapter 11 Plan, specifically the potential use of stablecoins—cryptocurrencies designed to be pegged to a stable asset like the US dollar.

In the document, the SEC does not explicitly deem such transactions as illegal but underscores its authority to challenge these transactions under US securities laws. The 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.”

Notably, the SEC has demanded that the Debtors remove the discharge provision from the Plan and the proposed confirmation order, in addition to requesting other specific amendments to both documents. The SEC has also made it clear that it holds the right to object to the approval of the Plan should these modifications not be implemented.

This stance comes despite the SEC recently dropping its enforcement actions against certain stablecoin operators, reflecting a inconsistent stance against cryptocurrencies. Industry experts have reacted to the SEC’s position with strong criticism. Alex Thorn, head of research at Galaxy Digital, voiced his dissent on X, questioning the SEC’s consistent oversight claims over stablecoins.

“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,” Thorn stated via X.

He further elaborated that the letter of the SEC is “quite absurd if you think about it.” Thorn added that “no one, including most other regulators and both parties, thinks the SEC should have oversight of genuine ‘number stay flat’ technologies. The SEC doesn’t even make a case here. They are just unwilling to let it go. it’s a bludgeon they must keep sharp, lest any legitimate actors deign to wield these (boringly above-board) instruments.”

The upcoming hearing, scheduled for October 7, 2024, will be critical in determining the feasibility of FTX’s repayment plan under the scrutiny of SEC regulations.

At press time, FTT traded at $1.23.