SEC warns FTX exchange against paying back creditors in stablecoins, digital assets

A US court had ordered FTX exchange to pay $12.7 billion and compensate creditors, victims of fraud, nearly five months after founder Sam Bankman-Fried’s imprisonment. A recent court filing, dated August 30 shows that the Securities & Exchange Commission warned the bankrupt exchange of paying back creditors in kind, or in cryptocurrencies. 

The current plan is to pay creditors in cash and US Dollar-pegged stablecoins. 

SEC against crypto payments to FTX’s creditors 

The US financial regulator warned FTX exchange that it reserves the right to question the legality of claims paid using money from “crypto asset securities.” The SEC’s recent filing notes that FTX’s plan to pay users and fraud victims does not specify if the provision to make stablecoin payments is approved and who will distribute the tokens. 

SEC filing dated August 30

Why FTX went bankrupt 

In late 2022 during the crypto-market correction, FTX exchange imploded and went bankrupt. FTX founder Samuel Bankman-Fried faced imprisonment for 25 years and was convicted of fraud, conspiracy to launder money and ordered to forfeit $11 billion in assets. 

FTX exchange was worth $32 billion in 2022 and the exchange’s executives used customer funds for investments that would qualify as risky. In the lawsuit, prosecutors referred to the executives’ actions as “old-fashioned embezzlement,” disguised under new technology. 

The founder was held liable for taking $8 billion from users. 

Road ahead 

The SEC has reserved the right to comment on the legality of payments involving cryptocurrencies. Further, the regulator joined hands with the US Trustee overseeing the bankruptcy and objected to a discharge provision in the bankruptcy plan that would indemnify the FTX debtors from future legal actions by creditors. 

FTX’s bankruptcy fee surpassed $800 million per a report by TheBlock and as of May 2024, the exchange agreed to pay 98% of its creditors, including individual investors who held $50,000 or less with the exchange.