Voyager Judge Won’t Let SEC Fine Crypto Advisers Over Bankruptcy

US regulators won’t be allowed to punish executives or advisers involved in the bankruptcy of Voyager Digital Ltd. for creating a new cryptocurrency that would help repay customers of the failed digital asset lender, a judge said Monday.

(Bloomberg) — US regulators won’t be allowed to punish executives or advisers involved in the bankruptcy of Voyager Digital Ltd. for creating a new cryptocurrency that would help repay customers of the failed digital asset lender, a judge said Monday.

The comments by US Bankruptcy Judge Michael Wiles reflect a growing conflict between efforts to rehabilitate troubled crypto companies and an increased regulatory push by the US Securities and Exchange Commission. SEC lawyers have opposed a legal protection typically given to executives and restructuring advisers of a bankrupt company. The protection blocks lawsuits against those professionals for implementing a court-approved bankruptcy plan.

The SEC’s position would “leave a sword hanging over the heads of anybody who’s going to do this transaction,” Wiles said. “How can a bankruptcy case or any court proceeding function with that kind of suggestion?”

Wiles’s remarks came during the third day of debate over a plan by Voyager to issue a new cryptocoin and sell itself to Binance.US, the US arm of the world’s biggest crypto exchange. SEC lawyers argue that the proposals likely will violate federal law because, in their view, the new coin is an unregistered security and Binance.US is operating an unregulated securities exchange. 

SEC lawyer Therese A. Scheuer argued that the legal protections are so broad that Voyager employees and lawyers would have permission to violate securities laws. After several minutes of debate, Voyager lawyers agreed to change the plan to narrow the legal releases.

Voyager must win court approval of its sale to Binance.US by March 6, or the deal could be canceled.

The protections would still allow the SEC and other regulatory agencies to take court action to shut down Binance.US or block Voyager from issuing the cryptocoin, Wiles said. But allowing the SEC to go after individuals for their work on the proposals, should they be approved, would be wrong, Wiles said.

The SEC and a handful of Voyager customers are fighting the sale and the related payout plan, but for different reasons. The customers have complained that Voyager should have turned over their crypto assets earlier and that the Binance.US deal is risky.  

The bankruptcy is Voyager Digital Holdings Inc., 22-10943, U.S. Bankruptcy Court for the Southern District of New York (Manhattan).

(Updates with comments from judge in third paragraph.)

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