SEC criticized for dubious stance on stablecoins in FTX bankruptcy

The Securities and Exchange Commission is facing criticism for its recent filing on the FTX bankruptcy, echoing its controversial approach in the Voyager case.

In a recent presentationThe SEC has warned FTX's estate that it may object to plans to repay creditors with stablecoins or other digital assets, citing potential legal concerns.

This means the SEC could challenge FTX’s current plan to repay creditors in cash or US dollar-pegged stablecoins, despite the agency’s objections regarding a provision to shield FTX from future legal liability.

James Murphy, attorney and strategic advisor, x.com/MetaLawMan/status/1830586328343343347″ target=”_blank” rel=””>commented On September 2, 2022, Voyager's bankruptcy and the SEC's repeated tactic of being vague regarding cryptocurrency transactions and clarity, which critics say stalls the bankruptcy process.

The SEC attempted to apply exactly the same tactic of hiding the ball in the Voyager bankruptcy, and the judge appropriately rejected the ploy:

Traveler's Judge:
“I can't just put the whole case on hold indefinitely and expensively while regulators decide whether to do it or not…” https://t.co/fslRv2tMXZ

—MetaLawMan (@MetaLawMan) twitter.com/MetaLawMan/status/1830586328343343347?ref_src=twsrc%5Etfw” target=”_blank” rel=””>September 2, 2024

In the case of Voyager's bankruptcy, the company filed for Chapter 11 bankruptcy in July 2022 after experiencing significant financial difficulties, largely due to the collapse of its primary debtor, Three Arrows Capital.

The SEC was heavily involved in monitoring Voyager’s plans to pay customers using stablecoins, and expressed concern that these payments could be considered unregistered securities. This complicated the bankruptcy resolution and led to delays and legal challenges.

During this process, a judge rebuked the SEC for its vague objections to stablecoins, according to Murphy, insisting that regulators must clearly state their concerns if they have any.

FTX's latest SEC filing

The SEC’s latest filing in the FTX case warns that it could again challenge the legality of paying creditors in stablecoins or other digital assets. However, the agency stops short of declaring such actions illegal and reserves the right to raise objections in the future.

This repeated lack of clarity has drawn the ire of industry observers, who believe it undermines the SEC's mission of protecting investors.

The SEC did not directly state that such an action would be illegal, writing: “The SEC does not opine on the legality, under the
federal securities laws, of the transactions described in the Plan,” but notes that the agency “… reserves the right to challenge the transactions… https://t.co/zAMqY7mTcd

— paulgrewal.eth (@iampaulgrewal) twitter.com/iampaulgrewal/status/1830383985249399093?ref_src=twsrc%5Etfw” target=”_blank” rel=””>September 1, 2024

“Investors, consumers and markets deserve better. Much better.” x.com/iampaulgrewal/status/1830383989330452829″ target=”_blank” data-type=”link” data-id=”https://x.com/iampaulgrewal/status/1830383989330452829″ rel=””>tweeted Paul Grewal, Coinbase's chief legal officer, responding to the lack of transparency.

Critics argue that the SEC's approach introduces additional uncertainty to an already complex bankruptcy, leading some to question whether this strategy truly serves the interests of investors or whether it simply prolongs the entire bankruptcy process.