SEC Threatens to Delay FTX User Payouts Amid Ongoing Regulatory Uncertainty

Customers have been waiting for nearly two years for their compensation. Frustration is growing as a potential delay from the SEC looms. This comes from the regulator’s stance that most digital assets are considered securities.

The U.S. Securities and Exchange Commission (SEC) is threatening to oppose FTX's plan to repay users in stablecoins. In a recent filing, the agency reaffirmed its authority to challenge transactions involving crypto assets, even if those assets, like stablecoins, are tied to the U.S. dollar. This could complicate the bankrupt crypto exchange's efforts to return funds to its creditors.

This spring, FTX proposed a plan to repay up to $16.3 billion to users who have been unable to access their funds since the platform collapsed in November 2022. Many creditors prefer payments in kind, which would allow them to benefit from the 122% rise in cryptocurrencies since the collapse. However, FTX’s liquidation plan aims to settle claims either in cash or stablecoins, based on the dollar value of assets at the time of bankruptcy.

No specific stablecoin has been chosen for the repayment plan. The two largest by market value are Tether (USDT) and USD Coin (USDC), with market capitalizations of $118 billion and $35 billion, respectively. Both have faced scrutiny. Tether has yet to provide financial statements audited by certified public accountants. Meanwhile, USDC issuer Circle has a reputation for transparency, but it faced a $3.3 billion exposure when its deposits at Silicon Valley Bank became temporarily inaccessible during the bank's collapse in March 2023. Thankfully, all uninsured assets were eventually covered, preventing any loss to Circle's reserves. Despite various efforts to pass stablecoin legislation in Congress, none have succeeded so far.

This regulatory uncertainty could delay payouts or affect how they are processed.

In an August 30 filing, the SEC stated, “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.” This stance mirrors its earlier filing in June, where it also objected to a provision in the plan that would protect the exchange from future legal liabilities.

The SEC also raised concerns that FTX has yet to designate a "distribution agent," the entity responsible for handling the payouts.

FTX has not responded to Forbes’ request for comment at this time.

Industry insiders have expressed frustration with the SEC’s approach. Alex Thorn, head of research at Galaxy Digital, which was hired in September 2023 as an investment manager for FTX, shared his thoughts on X: “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.”

Paul Grewal, chief legal officer at Coinbase, also voiced his concerns on X: “Why provide clarity to the market when threats and aspersions will do? Investors, consumers, and markets deserve better. Way better.” Coinbase has acted as a distribution agent in other high-profile crypto bankruptcies, including Celsius and BlockFi.

The SEC’s actions are reminiscent of its involvement in the bankruptcy of Voyager Digital, a crypto brokerage that filed for Chapter 11 in New York in July 2022. In that case, Judge Michael Wiles criticized the SEC for initially refusing to publicly state its position. Once forced to address the matter, the SEC suggested that Voyager’s VGX token had aspects of a security, although the agency never took a definitive stance. Voyager planned to repay customers using the same types of cryptocurrencies they held, with USDC being used for unsupported assets or the proprietary VGX token. Wiles condemned the SEC’s vague objections, stating, “I cannot simply put the entire case into an indeterminate and expensive deep freeze while regulators figure out whether they do or do not think there is any problem with the transactions that are being proposed.”

He added, “If there is a problem, I expect a regulator to tell me that it has an actual objection and what the issue is.”

Some believe the increased attention to the SEC’s stance in this case may be politically driven. Kyle, a bankruptcy specialist and FTX creditor advocate known as "Mr. Purple" on X, stated, “I think the reason it's getting more news today is because, if there was a political reset regarding crypto, you would think that the SEC would back off on bringing more enforcement actions, not keep adding to the fire.”

FTX creditor Sunil Kavuri expressed hope for a swift resolution, saying, “We're hopeful Judge Dorsey will follow the same school of thought as the Voyager judge.”

Key upcoming dates in the case include the anticipated release of an independent examiner’s report by the end of the month and a plan confirmation hearing set for October 7.