Prime Trust facing bankruptcy crisis, what are the potential ripple effects?
Original author: Mia, ChainCatcher
Another large-scale cryptocurrency custodian is on the brink of bankruptcy - Prime Trust, which was favored by well-known cryptocurrency companies such as Binance.US, FTX, and Celsius, for storing assets and providing banking services, is now in a situation of insolvency or being taken over by regulatory authorities.
Just today, DB NEWSWIRE revealed on its social media that the Financial Institutions Division (FID) of the state of Nevada in the United States stated that Prime Trust lost access to its old wallets as early as 2021 and misappropriated client assets to repurchase cryptocurrencies. Prime Trust owes clients $85.67 million in fiat currency and $69.509 million in digital currency, but currently holds only $2.904 million in fiat currency and $68.648 million in cryptocurrencies.
The news has caused quite a sensation. As one of the giants in custodial services for cryptocurrencies, Prime Trust has been illicitly using client funds since 2021. It is worth noting that Prime Trust had business dealings with FTX, Celsius, and others, which is deeply worrying.
On June 23, the FID issued a cease and desist order to Prime Trust, ordering the company to stop all activities in violation of Nevada state regulations, claiming that the company's "overall financial condition has deteriorated significantly", operating at a substantial deficit, and may even be insolvent.
Currently, the FID has requested the appointment of a receiver to take over the day-to-day operations of Prime Trust and conduct a thorough examination of its financial condition in order to determine the best course of action for Prime's clients: either rectify the situation and return the company to private management or liquidate it.
In response to the previous cease and desist order, TrueUSD, a stablecoin and one of the custodial clients of Prime Trust, immediately responded by stating that their funds are still secure, TrueUSD does not have any exposure to the risks of Prime Trust, and is not affected by this situation, with all user funds being safe. Earlier this month, TrueUSD issued a statement announcing the temporary suspension of minting through Prime Trust.
In addition, at the beginning of this month, the cryptocurrency custodian company BitGo reached a preliminary agreement to acquire Prime Trust, which undoubtedly brought a glimmer of hope to the embattled Prime Trust. However, just 12 days after this news was announced, BitGo suddenly announced the termination of the acquisition, undoubtedly putting an end to Prime Trust's last hope of survival.
Today, Coinbase Product Manager Conor Grogan also revealed on social media that according to Arkham data, Prime Trust Wallet holds a total of $69.71 million in digital assets, with a holding of $61.51 million for AUDIO, accounting for 88% of its cryptocurrency assets. As we all know, AUDIO is one of the tokens in the FTX system. During its peak, the price once rose to $4.4, but now it has fallen to $0.18, a decrease of 24 times, which may be closely related to the imminent collapse of Prime Trust.
All these big and small events quietly happened in June, seemingly accelerating the collapse of this encrypted "building".
So, why has the once glorious Prime Trust fallen into such a situation? Is it the butterfly effect after FTX bankruptcy, or poor internal management of the company? What will become of the stablecoin TUSD that it was responsible for custodying?
The beginning and end of Prime Trust's near bankruptcy
Prime Trust was established in 2016 and is headquartered in Las Vegas, Nevada. It was not initially a company providing crypto services. It initially focused on custodial agency and held funds for early-stage enterprise financing. Prime Trust began to shift to cryptocurrencies in 2018 and agreed to custody the US dollar reserve for TrustToken, the issuer of the TrueUSD stablecoin. Prime Trust promotes the innovation of the digital economy by providing financial infrastructure to fintech and digital asset innovators. Its main business includes token and fiat currency custody, fund processing, anti-money laundering, know-your-customer compliance, and trading technology services.
Prime Trust's founder and former CEO Scott Purcell resigned at the beginning of 2021. Since then, Prime Trust has been taken over by Tom Pageler and was dismissed at the end of last year, with Jor Law serving as the interim CEO. The mobility of the CEO seems to imply some internal issues in Prime Trust.
In fact, with the strong rebound of Bitcoin in 2021, Prime Trust's crypto business has also developed vigorously. Prime Trust revealed at the end-of-year press conference in 2021 that the company added hundreds of new accounts in that year, and the total amount of custodied assets almost doubled.
According to RootData, Prime Trust raised a total of $63.98 million in Series A financing in July 2021. The round was led by Traverse, a growth equity fund of Mercato Partners, with participation from Samsung Next, Kraken Ventures, Seven Peaks Ventures, and others. In June of the following year, Prime Trust announced another $107 million in Series B financing. With over $170 million raised in these two rounds of financing, it's astonishing that they are already facing financial difficulties less than a year later, indicating potential serious operational problems. Scott Purcel, the founder of Prime Trust, revealed in an interview that internal management became chaotic after he left the company. Despite raising a significant amount of money from investors, the results have been minimal.
As the rebound of cryptocurrency subsided, Celsius Network, a cryptocurrency lending platform, and FTX, a cryptocurrency exchange, both filed for bankruptcy in the second half of 2022. In August 2022, Celsius sued Prime Trust, attempting to recover over $17 million worth of cryptocurrency held by the latter. Celsius claims that although Prime Trust had returned $119 million worth of cryptocurrency assets when the agreement was terminated in June 2021, they are currently refusing to fulfill their obligations to transfer 398 BTC, 196,268 CEL tokens, 3,740 ETH, and 2.2 million USDC. However, Prime Trust agreed to return the assets during the subsequent bankruptcy hearing.
Prime Trust faced another blow as the FTX crypto empire collapsed. It is reported that FTX US had kept its US dollar reserves in custody by Prime Trust, and there were also personal financial transactions between the top executives of Prime Trust and FTX. It was revealed that SBF, the founder of FTX, had used Prime Trust to make donations to a political action committee he supported. The source of Prime Trust's previous $500,000 donation to the state Democratic Party can be traced back to Nishad Singh, a former high-ranking executive at FTX.
The successive bankruptcies of major clients have put Prime Trust in a dilemma. In order to reduce operating costs, Prime Trust laid off one-third of its staff at the beginning of this year and ceased all operations in Texas, USA.
In fact, Prime Trust, as a custodian, should be a relatively safe part of the financial system and does not engage in high-risk activities. As an intermediary, Prime Trust helps digital asset companies place cash in the banking network and becomes an important partner for digital asset companies that have difficulty directly accessing the banking system. Therefore, when Silvergate and Signature Bank collapsed, Binance.US also chose to hold client funds through Prime Trust in April this year, entrusting its client funds to Prime Trust for custody.
However, earlier this month, Binance.US was sued by the SEC, which sought to freeze assets related to Binance.US Holdings and its operating companies BAM Management US Holdings and BAM Trading Services. Once again, Prime Trust lost an important client.
On the 14th of this month, banq, a subsidiary of Prime Trust, filed for bankruptcy protection with the bankruptcy court in Nevada. According to the bankruptcy application, the company has approximately $17.72 million in assets and $4.5 million in liabilities. Meanwhile, Abra, the cryptocurrency lending institution affiliated with Prime Trust, is facing allegations of "securities fraud" from the Texas Securities Commission, claiming that it has been bankrupt or near bankruptcy for several months.
Subsequently, FID formally took measures against Prime Trust starting on the 23rd of this month. Possibly influenced by this injunction, cryptocurrency custodian BitGo announced the withdrawal of its provisional agreement to acquire Prime Trust.
After being abandoned by regulatory responsibilities and potential acquirers, Prime Trust, once thriving, has gradually reached the brink of bankruptcy. At present, the company has ceased all cash and cryptocurrency deposits and withdrawals, facing the risk of liquidation. In addition, cryptocurrency enterprises that have assets placed in Prime Trust also face uncertain risks and future.
Prime Trust's sudden closure triggers chain reaction
The sudden closure of Prime Trust has inevitably caused ripples among its client base. If Prime Trust really cannot escape the fate of bankruptcy, the related cryptocurrency enterprises will also not be spared.
Securitize, a blockchain company that keeps investor cash deposits for Prime Trust's trading platform, stated that some functions are currently suspended and it will transition to a new custodian as soon as possible, ensuring the safety of clients. Coinmetro, an Estonian cryptocurrency exchange, also stated on its official social platform that it is unable to process new USD transactions due to the suspension of deposits and withdrawals by Prime Trust.
In addition, financial advisory platform service company Swan Bitcoin previously listed Prime Trust as its custodian and listed all tokens of the TradeFi financial advisory platform as being held by Prime Trust. However, Swan Bitcoin has now revealed its intention to terminate the agreement with Prime Trust.
Although Prime Trust has not publicly disclosed the specific amount it holds in custody, official information shows that Prime Trust's custodial services cover a wide range of financial and technology industries, including but not limited to digital asset exchanges such as Bitstamp, Bittrex Global, OKCoin, Zilliqa; security issuance platforms such as Securitize, Harbor, SeriesOne; real estate investment platforms such as RealBlocks, Elevated Returns. If Prime Trust fails to fulfill its custodial responsibilities, clients' assets may be at risk of loss or freezing. Furthermore, if Prime Trust goes bankrupt, its clients may not be able to continue using its custodial services.
In addition, if Prime Trust goes bankrupt, clients may be offered protection through FDIC insurance, which is regulated by the Federal Deposit Insurance Corporation (FDIC) and the Nevada Division of Financial Services. The maximum insurance amount per client is $250,000.
Will this affect TUSD (TrueUSD)?
After Prime Trust suspended deposits and withdrawals, TrueUSD informed clients with associated accounts with Prime Trust via email that they would be unable to mint or redeem the stablecoin TUSD during Prime Trust's suspension of operations. With the strong promotion on the Binance platform, TrueUSD has transitioned from an unknown stablecoin project to the mainstream market, and its market share has rapidly increased. According to Coinmarketcap data, as of the time of writing, the total issuance of TUSD is close to $3.14 billion.
It is reported that TrueUSD is a stablecoin issued by TrustToken on the Ethereum and Binance Smart Chain. Holders can mint the same amount of TUSD by depositing US dollars, and they can also exchange TUSD for US dollars at any time. The deposited US dollars will be stored in different bank accounts and supervised and audited by third-party institutions. The initial US dollar reserves behind TrueUSD were held by Prime Trust. However, TrustToken has now established partnerships with other custodial institutions to reduce the risk of TUSD caused by the bankruptcy of a single custodian.
Previously, TrueUSD temporarily decoupled from its partner Prime Trust due to FUD (fear, uncertainty, doubt), but TrueUSD immediately responded on social media that "the minting and redemption services of TUSD are not affected and will continue to operate as usual," and the price of TUSD quickly returned to normal.
During a recent series of fluctuations, including Prime Trust ceasing to be acquired by BitGo, being scrutinized by the regulatory authorities in Nevada, and suspending deposits and withdrawals, TUSD seems to be unaffected. TrueUSD has once again clarified that it will maintain multiple channels for minting and redeeming US dollars.
According to the reserve report today, TUSD has funds worth $26,434 in a US depository institution that has been ordered to stop withdrawals, of which $26,269 is related to customer withdrawals and token exchanges, but it does not specify which US institutions the funds are deposited in. We can boldly speculate that this institution is probably Prime Trust, and such a small amount of funds is negligible compared to the total issuance of TUSD of $3.13 billion.
The size of the exposure cannot be determined at present. Although TUSD previously stated that there is "no exposure" to Prime Trust, if Prime Trust applies for bankruptcy protection, it is most likely to affect the issuance of TUSD. Second, the process of exchanging TUSD for US dollars or other currencies may be restricted or delayed, causing inconvenience to TUSD holders. In addition, if the issuance of TUSD is restricted or the exchange process is delayed, it may increase the market's uncertainty about TUSD, leading to price fluctuations.
Prime Trust, although gradually heading towards the abyss, has not affected the development of TUSD. On the contrary, TUSD's supply increased from slightly over $2 billion on June 14th to $3.13 billion on June 21st, a 56.5% increase, just before Bitcoin broke through the $30,000 mark.
Summary
After experiencing the bankruptcy year of FTX in 2022 and the collapse of Silvergate and Signature Bank, as well as the legal disputes faced by Binance and Coinbase against the SEC, major cryptocurrency companies are quietly strengthening their risk resistance capabilities and preparing for "black swan events" at all times.
Currently, Prime Trust is still on the edge of bankruptcy. The official statement has not yet been given at this time, but its credibility in the cryptocurrency industry has obviously reached a low point. Whether there are still industry institutions willing to extend an olive branch at this critical moment to rescue it from the dire situation, or if another small controversy becomes the last straw that breaks the camel's back, remains to be seen.
