Experts Criticize SEC for Stopping FTX on Crypto Repayments

Highlights:

• FTX’s crypto repayments to victims have drawn US SEC scrutiny.
• Coinbase CLO Paul Grewal criticizes SEC for creating regulatory uncertainty.
• SEC also objects to FTX’s plan to protect debtors from future legal actions.

In the most recent filing, the US Securities and Exchange Commission (SEC) has warned the bankrupt crypto exchange FTX of repaying victims with stablecoins or other crypto assets. Coinbase CLO Paul Grewal has criticized the SEC, alleging that the regulator is deliberately perpetuating uncertainty around crypto regulations.

SEC Cautions FTX Against Repaying Creditors with Stablecoins or Other Cryptocurrencies

In an Aug. 30 filing to the United States Bankruptcy Court in Delaware, SEC lawyers stated that creditor repayments with stablecoins may not be technically illegal. However, the SEC reserved the right to challenge repayments made with US-dollar-pegged crypto assets. 

The U.S. #SEC has warned that it might challenge the repayment plan of the defunct #crypto exchange #FTX, particularly if the repayments are made using #stablecoins.

While the SEC acknowledged that such payments may not be illegal, it reserves the right to contest transactions… pic.twitter.com/mlFHrV63Ar

— TOBTC (@_TOBTC) September 2, 2024

After the exchange collapsed in November 2022, FTX explored various strategies to compensate creditors, including now-binned plan to reboot the exchange. Although some creditors have called for in-kind distributions, i.e. repaying lost crypto in crypto rather than in cash, the exchange’s current plan is to pay creditors back in cash—or US dollar pegged stablecoins.

The regulator wrote:

“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.” 

Additionally, the SEC pointed out that the current repayment plan has not yet designated a “distribution agent”—the firm responsible for distributing funds to creditors, either in cash or stablecoins. The SEC’s warning angered crypto experts like Alex Thorn from Galaxy Digital and Paul Grewal, Coinbase’s chief legal officer. They criticized the regulator for being too aggressive and making unfair threats to FTX creditors.

The SEC, along with the US Trustee overseeing the bankruptcy, has objected to a discharge provision in the plan that would protect 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 US Trustee wrote in his filing, citing the relevant statute.

Since the collapse of the exchange, the administrative costs of FTX’s bankruptcy have soared. Recent fee requests from its staff have exceeded $800 million, according to a tally by X user Mr. Purple.

Coinbase CLO Slams SEC for Restricting FTX’s Crypto Payments

Coinbase CLO Paul Grewal criticized the SEC for its position on FTX’s bankruptcy plan. He also pointed out the agency’s failure to clarify the legality of the involved transactions. Commenting on the regulator’s claims to control crypto transactions, Grewal expressed frustration with the SEC’s approach. He questioned why the SEC opted to issue threats rather than offering clear guidance. Grewal emphasized that “Investors, consumers, and markets deserve better. Way better.”

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… https://t.co/zAMqY7mTcd

— paulgrewal.eth (@iampaulgrewal) September 1, 2024

Moreover, in a September 1 post on X, Thorn pointed out that the SEC is once again claiming the authority to classify dollar-backed stablecoins as “crypto asset securities.” This comes despite the regulator having dropped its case against Paxos, the issuer of Binance USD (BUSD), in July.

Thorn said:

“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 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

it’s quite absurd if you… pic.twitter.com/laT6vY5i6T

— Alex Thorn (@intangiblecoins) September 1, 2024