SEC warns FTX against paying creditors back in stablecoins, other crypto

Quick Take

  • A recent filing from the SEC warns the FTX estate that the agency might oppose any attempts to pay creditors back with stablecoins or other digital assets. 
  • The agency, like the U.S. Trustee, also opposed to a discharge provision that would limit the future legal liabilities of the FTX debtors’ estate. 

Throughout the FTX bankruptcy, many different avenues have been explored or proposed to maximize creditor recovery, from relaunching the FTX exchange in order to make money back for creditors to distributing claims as tokens in a new venture that can be traded.

Some decentralized marketplaces such as Found.xyz and Figure Markets even launched support for tokenized FTX claims trading this summer, in a move that one crypto CEO called "one of the most crypto things" he's ever seen. 

However, FTX, led by its CEO John Ray III and legal counsel Sullivan & Cromwell, shot down the idea of restarting the exchange, claiming no investors would put up the capital needed to spin the offshore exchange back up again. Though some creditors have called for in-kind distributions, i.e. repaying lost crypto in crypto rather than in cash as in the BlockFi and Genesis bankruptcies, FTX's current plan is to pay creditors back in cash—or U.S. dollar pegged stablecoins. 

Now, in a recent filing, the Securities and Exchange Commission has warned FTX that it reserves the right to challenge the legality of paying back claims or otherwise trying to make money from its stash of "crypto asset securities." The SEC's filing also notes that the plan fails to specify who would distribute the stablecoins, should that provision be approved. 

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 involving crypto assets." 

The SEC also joined the U.S. Trustee overseeing the bankruptcy in objecting to a discharge provision in the plan that would indemnify the FTX debtors from future legal actions by creditors. "Unless the Plan provides that the Debtors shall not receive a discharge and removes any discharge injunction, the Court should deny confirmation," the U.S. Trustee wrote in his filing, citing the relevant statute.

The administrative cost of FTX's bankruptcy has ballooned in the time since the exchange melted down; fees requested by its staff recently surpassed $800 million, according to a tally from X user Mr. Purple. 


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About Author

Zack Abrams is a writer and editor based in Brooklyn, New York. Before coming to The Block, he was the Head Writer at Coinage, a Web3 media outlet covering the biggest stories in Web3. The story he co-reported on Do Kwon won a 2022 Best in Business Journalism award from SABEW. Other projects included a deep dive into SBF's defense based on exclusive documents and unveiling the identity of the hacker behind one of 2023's biggest crypto hacks — so far. He can be reached via X @zackdabrams or email, [email protected].