SEC Challenges FTX Bankruptcy Plan Amid Distribution Concerns

The U.S. Securities and Exchange Commission (SEC) has raised significant concerns regarding the proposed bankruptcy plan of FTX, a cryptocurrency exchange that collapsed in late 2022. In a court filing made on Friday, the SEC indicated that it might challenge any plans involving the distribution of crypto assets to creditors, which could delay the confirmation of the bankruptcy plan.

Earlier this year, the FTX bankruptcy estate put forth a proposal aimed at providing a swift resolution for creditors. The plan suggested that 98% of creditors would potentially receive back 118% of their claims in cash within 60 days of the court’s approval. However, the SEC’s recent comments introduce uncertainty into this timeline.

One of the primary points of contention involves the definition of “cash.” In a previous filing dated August 2, the FTX bankruptcy estate defined cash to include not only traditional U.S. currency but also U.S. dollar-pegged stablecoins—cryptocurrencies designed to maintain a stable value against the U.S. dollar. The specific language from the earlier filing stated that cash encompasses “the legal tender of the United States of America or the equivalents thereof, including U.S. Dollar pegged Stablecoin, bank deposits, checks and other similar items.”

However, the SEC has expressed concerns regarding this definition. In its recent filing, the SEC stated, “FTX Debtors are exploring different distribution options, including potentially distributing stablecoins to certain creditors.” The SEC made it clear that it is not making any determinations about the legality of the transactions outlined in the plan under federal securities laws, but it reserves the right to contest any transactions involving crypto assets. This indicates that the SEC is keeping a close watch on how crypto assets are treated in bankruptcy proceedings, which represents an evolving area of law.

Furthermore, the SEC pointed out that the bankruptcy estate has yet to identify a distribution agent responsible for managing the distribution of stablecoins to creditors. This lack of clarity adds another layer of complexity to the situation, as a distribution agent plays a crucial role in ensuring that the process is conducted fairly and transparently.

Industry experts have voiced their concern over the SEC’s intervention. Alex Thorn, head of research at Galaxy Digital, criticized the SEC’s stance, asserting that it exemplifies “the height of jurisdictional overreach.” He further remarked on social media platform X that the SEC’s filing does not present a compelling case and seems more like an attempt to maintain control over the evolving crypto landscape. Thorn’s comments reflect a broader sentiment in the cryptocurrency community, where many feel that regulatory bodies are sometimes overstepping their bounds and stifling innovation in the industry.

In addition to its concerns regarding the distribution of assets, the SEC has also aligned with the U.S. Trustee’s office, advocating for the removal of a provision in the bankruptcy plan that would discharge the Debtors from certain obligations. This suggests that the SEC is taking a more aggressive stance, indicating that it may object to the confirmation of the bankruptcy plan unless these changes are made. The implications of this are significant, as it could prolong the bankruptcy proceedings and leave creditors in a state of uncertainty.

As the situation develops, it is crucial for all parties involved—creditors, the bankruptcy estate, and regulatory agencies—to navigate this complex landscape carefully. The outcome of this case could set important precedents for how cryptocurrency assets are treated in bankruptcy and the broader regulatory framework surrounding digital assets.

Conclusion

The SEC’s scrutiny of FTX’s bankruptcy plan highlights the ongoing tensions between traditional financial regulatory frameworks and the rapidly evolving world of cryptocurrency. With the potential for a legal challenge looming, stakeholders must remain vigilant and informed as they await further developments in this landmark case.