SEC Challenges FTX's Repayment Plan Amid Mounting Bankruptcy Costs

Amid the ongoing FTX bankruptcy proceedings, various strategies have been explored to maximize the recovery for creditors. Proposals have ranged from relaunching the FTX exchange as a means to generate funds, to innovative approaches like distributing claims as tokens in new ventures, which could be traded by creditors.

In a notable development, decentralized platforms such as Found.xyz and Figure Markets introduced support for trading tokenized FTX claims over the summer. This move, which one crypto industry leader described as "one of the most crypto things" he had ever witnessed, sparked considerable interest.

Despite these creative proposals, FTX, under the leadership of CEO John Ray III and the legal guidance of Sullivan & Cromwell, ultimately dismissed the idea of restarting the exchange. They argued that the necessary capital to revive the offshore exchange would be unattainable. Although some creditors advocated for repayments in the form of cryptocurrency rather than cash—similar to what was seen in the BlockFi and Genesis bankruptcies—FTX's current plan is to repay creditors in cash or stablecoins pegged to the U.S. dollar.

The situation took a new turn when the Securities and Exchange Commission (SEC) issued a warning to FTX. In a recent filing, the SEC stated it reserves the right to challenge the legality of any attempts to repay claims or generate revenue from FTX's "crypto asset securities." The filing also highlighted a potential issue with the plan, which fails to specify who would be responsible for distributing the stablecoins, should that approach be approved. While the SEC did not explicitly declare such actions illegal, it emphasized that it "...reserves its rights to challenge transactions involving crypto assets."

Adding to the complexity, the SEC joined the U.S. Trustee overseeing the bankruptcy in objecting to a discharge provision within the plan. This provision would shield FTX debtors from future legal claims by creditors. The U.S. Trustee argued that unless the plan clearly states that debtors will not receive a discharge, the court should deny its confirmation.

The cost of managing FTX's bankruptcy has surged dramatically, with administrative fees surpassing $800 million, according to a tally shared by X user Mr. Purple. This staggering amount highlights the financial burden and challenges faced as the proceedings continue.