SEC Challenges FTX’s Repayment Strategy
The U.S. Securities and Exchange Commission (SEC) is poised to contest FTX’s strategy to reimburse users with stablecoins. In a recent filing, the SEC reinforced its jurisdiction to “challenge transactions involving crypto assets,” including those stablecoins that are tied to the U.S. dollar. This development could complicate the already intricate process for the bankrupt crypto exchange as it seeks to return funds to its creditors. Earlier this year, FTX announced a proposal to repay up to $16.3 billion to users who have been unable to access their funds following the platform’s downfall in November 2022. While many creditors would prefer to receive payments in the form of cryptocurrencies—which have seen a 122% increase in value since the collapse—FTX’s liquidation strategy focuses on settling claims either in cash or stablecoins, based on the dollar value of assets at the time of bankruptcy. As of now, no specific stablecoin has been chosen for the repayment process.
Market Dynamics of Stablecoins
The two largest stablecoins by market capitalization are Tether (USDT) and USD Coin (USDC), valued at $118 billion and $35 billion, respectively. However, both have been embroiled in controversy. Tether has yet to release audited financial statements from certified public accountants, raising concerns about its transparency. In contrast, although Circle, the issuer of USDC, is regarded as more transparent and amicable towards regulators, it encountered a significant challenge with a $3.3 billion exposure when its deposits at Silicon Valley Bank became temporarily inaccessible during the bank’s collapse in March 2023. Fortunately, all uninsured assets were eventually secured, preventing losses to Circle’s reserves. Despite numerous attempts to introduce stablecoin legislation in Congress, none have succeeded, leaving a cloud of regulatory uncertainty that could hinder payouts or affect the processing methods.
SEC’s Position and Concerns
In its filing dated August 30, the SEC clarified that it is not making a judgment regarding the legality of the transactions detailed in FTX’s plan and retains the right to contest transactions related to crypto assets. This position aligns with an earlier filing from June, where the SEC expressed objections to a provision in the plan aimed at shielding the exchange from future legal liabilities. Additionally, the SEC highlighted that FTX has not yet appointed a “distribution agent”—the entity responsible for managing payouts. FTX has not provided a comment to inquiries regarding this matter.
Industry Reactions to SEC’s Stance
Industry insiders have voiced their dissatisfaction with the SEC’s approach. Alex Thorn, head of research at Galaxy Digital—an investment manager for FTX since September 2023—shared his frustration on social media, asserting that the SEC is not providing a substantial argument and seems unwilling to relent. He criticized the SEC for using threats instead of offering clarity to the market. Similarly, Paul Grewal, the chief legal officer at Coinbase, echoed these sentiments, stating that investors and consumers deserve a better regulatory environment. While Coinbase has acted as a distribution agent in other notable crypto bankruptcies such as Celsius and BlockFi, it has not disclosed whether it has been approached by FTX for a similar role.
Comparisons to Past Bankruptcy Cases
The SEC’s actions resemble its involvement in the bankruptcy case of Voyager Digital, a crypto brokerage that sought Chapter 11 protection in New York in July 2022. In that instance, Judge Michael Wiles criticized the SEC for its initial reluctance to publicly clarify its position. When compelled to address the issue, the SEC suggested that Voyager’s VGX token had characteristics of a security, although it stopped short of making a definitive ruling. Voyager had proposed to reimburse customers using the same cryptocurrencies they held in their accounts, utilizing USDC for unsupported assets or the VGX token. Wiles condemned the SEC’s ambiguous objections, stating that he could not indefinitely delay the case while regulators figured out whether there were any actual problems with the proposed transactions.
Political Implications and Future Expectations
The heightened scrutiny of the SEC’s position in this case may be influenced by political factors, as suggested by Kyle, a bankruptcy expert and advocate for FTX creditors. He speculated that increased media attention might stem from a potential political shift regarding crypto, as hinted by announcements from Kamala Harris’s campaign. FTX creditor Sunil Kavuri remains optimistic, hoping that Judge Dorsey will align with the Voyager judge’s perspective. Key upcoming milestones in this case include the expected release of an independent examiner’s report by the end of the month and a confirmation hearing for the plan scheduled for October 7.
