SEC Challenges FTX Bankruptcy Plan, Questions Legality of Claims Repayment
The SEC has raised concerns about FTX’s bankruptcy plan, questioning the legality of repaying creditor claims with stablecoins and reserving the right to contest transactions involving crypto assets. This comes amid ongoing objections to the plan’s discharge provisions and escalating administrative costs.
Because Bitcoin
September 2, 2024
As per a recent The Block report, the Securities and Exchange Commission has cautioned FTX that it may challenge the legality of repaying claims or making money from its "crypto asset securities." The SEC's filing also pointed out that the plan lacks details on who would be responsible for distributing the stablecoins if this approach is approved.
The SEC did not explicitly declare that such actions would be illegal, stating, "The SEC is not opining as to the legality, under the federal securities laws, of the transactions outlined in the Plan," but it did reserve the right to contest transactions involving crypto assets. Additionally, the SEC, along with the U.S. Trustee overseeing the bankruptcy, has objected to a provision in the plan that would shield the FTX debtors from future legal actions by creditors. The U.S. Trustee argued that unless the plan ensures the debtors do not receive a discharge and removes any discharge injunction, the Court should deny its confirmation.
During the FTX bankruptcy proceedings, various strategies have been considered or suggested to optimize creditor recovery. These range from relaunching the FTX exchange to generate funds for creditors, to distributing claims as tokens that could be traded in a new venture.
Despite these developments, FTX, under the leadership of CEO John Ray III and legal counsel Sullivan & Cromwell, has dismissed the idea of restarting the exchange. They argue that no investors are willing to provide the necessary capital to revive the offshore exchange. Although there have been calls from some creditors for in-kind distributions (repaying lost crypto with crypto rather than cash, as seen in the BlockFi and Genesis bankruptcies), FTX's current strategy involves reimbursing creditors with cash or U.S. dollar-pegged stablecoins.
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