Large crypto custody Prime Trust is on the verge of bankruptcy, and the crypto market will be hit hard again?

By Mia, ChainCatcher

Another large crypto custody teetering on the verge of bankruptcy — Prime Trust, once favored by well-known crypto companies such as Binance . The dilemma of regulatory takeover.

Just today, DB NEWSWIRE disclosed on its social media that the Nevada Financial Institutions Department (FID) stated that Prime Trust lost access to the old wallet as early as 2021 and misappropriated customer assets to buy back cryptocurrencies. Prime Trust owes customers $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 cryptocurrency.

The news has caused quite a stir. As one of the custody encryption giants, Prime Trust has been embezzling customer funds privately since 2021. You must know that Prime Trust has had business dealings with FTX, Celsius, etc., which is extremely frightening. .

On June 23, the FID issued a cease and desist order to Prime Trust, ordering Prime Trust to cease all activities in violation of Nevada regulations, claiming that the company's "overall financial condition has seriously deteriorated" and that it has run into huge deficits and may even be insolvent. .

At present, FID has requested the Nevada District Court to appoint a receiver to take over the company's daily operations on the grounds that "Prime Trust's operation method is unsafe and unsound" and to thoroughly examine all its financial conditions to determine what is most beneficial to Prime. The client's choice, either rectify and return the company to private management, or liquidate it.

In response to the previous stop order, the stablecoin TrueUSD, one of Prime Trust’s custody customers, immediately responded: its stablecoin TUSD funds are still safe, TrueUSD has no risk exposure to Prime Trust, is not affected by this situation, and all user funds are safe of. As early as the 10th of this month, TrueUSD issued a statement that it has temporarily stopped casting through Prime Trust.

In addition, at the beginning of this month, BitGo, an encrypted custody company and cryptocurrency custody company, reached a preliminary agreement to acquire Prime Trust, which undoubtedly brought a glimmer of life to the troubled Prime Trust. However, just 12 days after the news was announced, BitGo It suddenly announced the termination of the acquisition. There is no doubt that Prime Trust's last hope of survival was cut off.

Today, Coinbase product director Conor grogan also disclosed on social media that according to Arkham data, the Prime Trust wallet holds a total of 69.71 million US dollars in digital assets, of which AUDIO holds 61.51 million US dollars, accounting for 88% of its digital currency assets . As we all know, AUDIO is one of the FTX tokens. At its peak, the currency price once climbed to $4.4, but now it has fallen to $0.18, a drop of 24 times. This may be inseparable from the collapse of Prime Trust.

These large and small events all happened quietly in June, and it seems that everything is accelerating the collapse of this encrypted "building".

So why did the once glorious Prime Trust end up in such a mess? Is it the butterfly effect after FTX's bankruptcy, or the company's internal mismanagement? What will be the straw that breaks the camel's back? And where should the stablecoin TUSD, which was once in charge of custody, go?

Prime Trust is on the brink of bankruptcy

Prime Trust was established in 2016 and is headquartered in Las Vegas, Nevada. It was not a company that provided encryption services at first. Initially focused on escrow agents, holding funds for early stage corporate financing efforts. Prime Trust began its pivot to cryptocurrencies in 2018, agreeing to hold dollar reserves for TrustToken, the issuer of the TrueUSD stablecoin. Prime Trust drives innovation in the digital economy by providing financial infrastructure to fintech and digital asset innovators. Its main business includes providing token and fiat currency custody, funds processing, anti-money laundering, know-your-customer compliance and transaction technology services.

Prime Trust's founder and first chief executive officer, Scott Purcell, left in early 2021. Since then, Prime Trust has been taken over by Tom Pageler, who was fired late last year, with Jor Law acting as interim chief executive. The turnover of CEOs also seems to suggest that there is something wrong with the inner workings of the Prime Trust.

In fact, with Bitcoin's strong rally in 2021, Prime Trust's encryption business has also flourished. Prime Trust once revealed at the 2021 year-end press conference that the company has added hundreds of new accounts this year, and the total assets under custody have almost quadrupled.

According to RootData, Prime Trust raised a total of US$63.98 million in Series A financing in July 2021, led by Mercato Partners' growth equity fund Traverse, with participation from Samsung Next, Kraken Ventures and Seven Peaks Ventures. In June of the following year, Prime Trust once again announced the completion of a $107 million Series B round of financing. The two financings completed more than 170 million U.S. dollars in financing. With such a huge amount, it became "insolvent" after less than a year, which reflects to a certain extent that its operations may have serious problems. Scott Purcel, the founder of Prime Trust, revealed in an interview that since he left the company, internal management has been chaotic. Although he has received a lot of money from investors, it has had little effect.

Crypto lending platform Celsius Network, which is a Prime Trust customer, and crypto exchange FTX, both filed for bankruptcy in the second half of 2022 as the rally in cryptocurrencies faded. Celsius sued Prime Trust in August 2022, seeking to recover more than $17 million in cryptocurrencies held by the latter. Celsius said that when the two parties terminated the agreement in June 2021, although Prime Trust had returned USD 119 million worth of encrypted assets to Celsius, it still refused to perform its transfer of 398 BTC, 196,268 CEL tokens, and 3,740 ETH. and an obligation of 2.2 million USDC. At the subsequent bankruptcy hearing, Prime Trust agreed to return it.

Bigger blows followed, as the FTX crypto empire collapsed and Prime Trust was caught up in its scandalous spiral. It is reported that FTX US once hosted US dollar reserves in Prime Trust, and Prime Trust also had personal property exchanges with FTX executives. It was revealed that FTX founder SBF had used Prime Trust to donate to a political action committee it funded, and the source of Prime Trust’s previous donation of $500,000 to the state Democratic Party was also traced back to former FTX executive Nishad Singh.

The successive bankruptcies of major customers have put Prime Trust in a difficult situation. In order to cut operating costs, Prime Trust chose to lay off one-third of its employees at the beginning of this year and stopped all operations in Texas, USA.

In fact, as a custodian, Prime Trust 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, making it difficult to access directly. An important partner of digital asset companies in the banking system. Therefore, when Silvergate and Signature Bank collapsed, Binance.US also chose to hold customer funds through Prime Trust in April this year, entrusting its customer funds to Prime Trust for custody.

But earlier this month, the SEC sued Binance.US and sought to freeze assets related to Binance.US holding and operating companies BAM Management US Holdings and BAM Trading Services. Prime Trust has lost another major client.

On the 14th of this month, banq, a subsidiary of Prime Trust, filed for bankruptcy protection in the Nevada District Bankruptcy Court. According to the bankruptcy application, the company has assets of approximately US$17.72 million and liabilities of US$4.5 million. At the same time, Abra, Prime Trust’s crypto customer crypto lender, was also accused of “securities fraud” by the Texas Securities Commission, saying it had been bankrupt or close to bankruptcy for several months.

Immediately, FID began to take measures against Prime Trust formally on the 23rd of this month. Perhaps affected by this cease and desist order, cryptocurrency custody company BitGo also announced its withdrawal from the tentative agreement to acquire Prime Trust.

After being abandoned by regulators and potential acquirers, the once-thriving Prime Trust has also been on the verge of bankruptcy step by step. At present, the company has stopped all cash and cryptocurrency deposits and withdrawals, facing the risk of bankruptcy and liquidation. In addition, crypto companies that place assets on Prime Trust also face uncertain risks and futures.

Sudden closure of Prime Trust triggers knock-on effects

The sudden closure of Prime Trust sent ripples through its customer base. If Prime Trust really cannot escape the bad luck of bankruptcy, then the encryption companies related to it will not be spared either.

Securitize, a blockchain company that keeps investors' cash deposits for Prime Trust's trading platform, said that some functions have been suspended and will transition to a new custodian as soon as possible, and will ensure the safety of customers; Estonian encryption exchange Coinmetro is also on its official The social platform stated that due to the suspension of deposits and withdrawals by Prime Trust, it is currently unable to process new US dollar transactions.

In addition, Swan Bitcoin, a financial advisory platform service company, previously listed Prime Trust as a custodian and listed all tokens on the TradeFi financial advisory platform as Prime Trust custody. Swan Bitcoin has revealed that it intends to terminate the agreement with it.

Although Prime Trust has not publicly disclosed its specific custody amount, according to official information, Prime Trust’s custody service customer base covers a wide range of financial and technology industries, including but not limited to digital asset exchanges Bitstamp, Bittrex Global, OKCoin, Zilliqa, etc. ; securities issuance platforms Securitize, Harbor, SeriesOne, etc.; real estate investment platforms RealBlocks, Elevated Returns, etc., if Prime Trust fails to perform its custody duties, customers’ assets may be lost or frozen. In addition, if Prime Trust goes bankrupt, its customers It may not be possible to continue to use the hosting services it provides.

Additionally, in the event of Prime Trust's bankruptcy, as it is regulated by the Bank of America Insurance Company (FDIC) and the Nevada Department of Financial Services, FDIC insurance may protect customers up to $250,000 per customer.

Will it affect TUSD (TrueUSD)?

After Prime Trust suspended deposits and withdrawals, TrueUSD informed customers with accounts linked to Prime Trust in an email that they would not be able to mint or redeem the stablecoin TUSD while Prime Trust suspended operations. Since Binance began to vigorously promote it on its platform, TrueUSD has entered the mainstream from an unknown stablecoin project, and its share has grown rapidly. According to Coinmarketcap data, as of press time, the total circulation of TUSD is close to 3.14 billion US dollars.

It is reported that TrueUSD is a stable currency issued by TrustToken on Ethereum and Binance Smart Chain. Holders can mint the same amount of TUSD by depositing U.S. dollars, and can also convert TUSD into U.S. dollars at any time. The deposited U.S. dollars will be kept in different bank accounts and will be supervised and audited by a third-party organization. The US dollar reserve behind TrueUSD is hosted by Prime Trust. But at present, TrustToken has established a cooperative relationship with other custodians to reduce the risk to TUSD caused by the bankruptcy of a single custodian.

Previously, TrueUSD encountered FUD due to the suspension of its partner Prime Trust’s casting of TUSD, and there was a short-term decoupling. TrueUSD immediately posted a response on social media that “TUSD’s casting and redemption services will not be affected and will continue to operate as usual”, and then the price of TUSD returned to normal.

In the recent series of fluctuations such as Prime Trust's suspension of acquisition by BitGo, review by Nevada regulators and suspension of deposits and withdrawals, TUSD does not seem to be affected. TrueUSD clarified again that it will maintain multiple channels for minting and redeeming USD.

Today, TUSD has $26,434 worth of funds at a U.S. depository institution that has been ordered to halt withdrawals, according to a Reserve Report today, with $26,269 of the funds tied to customer withdrawals for tokens, without specifying which U.S. mechanism. We can boldly speculate that the institution is likely to be Prime Trust, and such a small amount of funds deposited is insignificant compared to the total circulation of TUSD of 3.13 billion US dollars.

At present, it is still impossible to clarify the size of the exposure. Although TUSD has previously stated that it has "no exposure" to Prime Trust, if Prime Trust files for bankruptcy protection, then the most likely impact will be the restriction of TUSD issuance; secondly, the conversion of TUSD into U.S. dollars or The process of other currencies may be restricted or delayed, causing inconvenience to users holding TUSD; in addition, if the issuance of TUSD is restricted or the exchange process is delayed, it may lead to increased market uncertainty about TUSD, resulting in Its price fluctuates.

Although Prime Trust is stepping into the abyss step by step, it has not affected the development of TUSD. On the contrary, the supply of TUSD increased from slightly more than 2 billion U.S. dollars on June 14 to 3.13 billion US dollars on June 21, an increase of 56.5%.

Summary

After the bankruptcy year of FTX in 2022 and the collapse of Silvergate and Signature Bank this year, Binance and Coinbase are caught in SEC lawsuits and other turmoil in the encryption industry, major encryption companies are silently strengthening their anti-risk capabilities like frightened birds , Prepare for the "black swan event" all the time.

Prime Trust is still on the verge of bankruptcy. At present, the official has not commented on it at this time, but its credibility in the encryption industry has obviously dropped to a "freezing point". Is there any industry organization that can throw an olive branch at this moment to save it from the dire straits; or another one A small disturbance became the last straw that broke the camel's back?