What are the potential chain reactions of Prime Trust facing bankruptcy crisis?

What would happen if Prime Trust went bankrupt?

Author: Mia, ChainCatcher

Another large cryptocurrency custodian is on the edge of bankruptcy – Prime Trust, which has been favored by well-known cryptocurrency companies such as Binance.US, FTX, and Celsius, providing asset storage and banking services, is now in the dilemma of “insufficient assets” or may be taken over by regulatory authorities.

Today, DB NEWSWIRE revealed in its social media that the Financial Institutions Division (FID) of Nevada, USA, stated that Prime Trust had lost access to its old wallet as early as 2021 and embezzled customer assets to repurchase cryptocurrencies. Prime Trust owes customers $85.67 million in fiat currency and $69.509 million in digital currency, but currently only holds $2.904 million in fiat currency and $68.648 million in cryptocurrency.

The news caused a sensation. As one of the custodian cryptocurrency giants, Prime Trust has been privately misappropriating customer funds since 2021. It is worth noting that Prime Trust has had business dealings with FTX, Celsius, and others, which is extremely worrying.

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On June 23, FID issued a cease-and-desist order to Prime Trust, ordering it to stop all activities that violate Nevada regulations, claiming that the company’s “overall financial situation has deteriorated severely”, with huge operating deficits and even possible insolvency.

Currently, FID has requested the appointment of a receiver to take over the company’s daily operations and thoroughly review all its financial conditions, based on the grounds that “Prime Trust’s operating methods are not safe and sound”, in order to determine the best option for Prime customers, either to rectify and return the company to private management, or to liquidate it.

In response to the previous cease-and-desist order, TrueUSD, one of Prime Trust’s custodial customers, immediately responded: its stablecoin TUSD funds are still safe, TrueUSD does not have a risk exposure to Prime Trust, has not been affected by this situation, and all user funds are safe. And on June 10, TrueUSD issued a statement announcing the temporary suspension of minting through Prime Trust.

In addition, earlier this month, cryptocurrency custodian BitGo had reached a preliminary agreement to acquire Prime Trust, which undoubtedly brought a glimmer of life to Prime Trust in distress. However, just 12 days after the announcement, BitGo suddenly announced the termination of the acquisition, undoubtedly cutting off 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, of which the holding of AUDIO is $61.51 million, accounting for 88% of its digital currency assets. As we all know, AUDIO is one of the tokens in the FTX series. At its peak, the coin price once soared to $4.4, but now it has fallen to $0.18, a decrease of up to 24 times, which may be inseparable from Prime Trust’s imminent collapse.

All these big and small events happened quietly in June, seemingly accelerating the collapse of this crypto “building”.

So why did the once glorious Prime Trust fall into such a situation? Is it the butterfly effect after the bankruptcy of FTX, or poor internal management of the company? What will be the last straw that crushes the camel? And where will the stablecoin TUSD, which it was responsible for custody, go?

The Beginnings of Prime Trust’s Imminent Bankruptcy

Prime Trust was founded in 2016 and is headquartered in Las Vegas, Nevada. At the beginning, it was not a company that provided crypto-related services. It initially focused on custodian agencies, holding funds for early-stage businesses’ financing. In 2018, Prime Trust turned to cryptocurrency and agreed to hold the US dollar reserves for TrustToken, the issuer of TrueUSD stablecoin. Prime Trust drives innovation in the digital economy by providing financial infrastructure to fintech and digital asset innovators. Its main business covers the provision of token and fiat currency custody, fund processing, anti-money laundering, know-your-customer compliance, and trading technology services.

Prime Trust’s founder and first CEO Scott Purcell resigned at the beginning of 2021. Since then, Prime Trust has been taken over by Tom Blockinggeler and was fired at the end of last year, and Jor Law served as interim CEO. The flow of CEOs seems to suggest that there have been some problems with Prime Trust’s internal operations.

In fact, with the strong rebound of bitcoin in 2021, Prime Trust’s crypto business has also flourished. Prime Trust revealed at the end-of-year press conference in 2021 that the company added hundreds of new accounts that year, and the total assets under custody almost doubled.

According to RootData, Prime Trust raised a total of $63.98 million in Series A funding in July 2021, led by growth equity fund Traverse of Mercato Blockingrtners, with participation from Samsung Next, Kraken Ventures, and Seven Peaks Ventures. In June of the following year, Prime Trust announced the completion of a $107 million Series B funding round. The two rounds of funding raised over $170 million, but less than a year later the company was reportedly struggling to pay its debts, suggesting serious operational problems. Prime Trust founder Scott Purcel revealed in an interview that internal management began to falter after he left the company, and although the company raised a lot of money from investors, it had little to show for it.

As the cryptocurrency rebound faded, Celsius Network and FTX, both of which were Prime Trust clients, applied for bankruptcy in the second half of 2022. Celsius sued Prime Trust in August 2022, attempting to recover over $17 million in cryptocurrency held in custody by the company. While Prime Trust returned $119 million worth of crypto assets to Celsius when the two parties terminated their agreement in June 2021, the company is still refusing to fulfill its obligation to transfer 398 BTC, 196,268 CEL tokens, 3,740 ETH, and 2.2 million USDC. However, Prime Trust agreed to return the assets in a subsequent bankruptcy hearing.

Prime Trust was further hit by the collapse of the FTX cryptocurrency empire. It was reported that FTX US had held its dollar reserves in custody with Prime Trust, and there was also personal financial dealings between Prime Trust and FTX senior executives. According to reports, FTX founder SBF used Prime Trust to make a donation to a political action committee he supported, while the $500,000 donation to the state Democratic Party made by Prime Trust’s former CEO was traced back to Nishad Singh, a former FTX executive.

The bankruptcies of major clients have left Prime Trust in a difficult position. To reduce operating costs, the company laid off one-third of its staff at the beginning of this year and stopped all business in Texas. As a custodian, Prime Trust was supposed to be a relatively safe part of the financial system and not engage in high-risk activities. As an intermediary, Prime Trust helped digital asset companies place cash in the banking network and became an important partner for digital asset companies that cannot directly enter the banking system. Therefore, when Silvergate and Signature Bank went bankrupt, Binance.US also chose to hold customer funds through Prime Trust and hand them over to Prime Trust for custody in April of this year.

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 lost another important customer.

On the 14th of this month, Prime Trust’s subsidiary banq applied for bankruptcy protection in a Nevada bankruptcy court. According to the bankruptcy application, the company has about $17.72 million in assets and $4.5 million in liabilities. At the same time, Prime Trust’s crypto client, crypto loan institution Abra, was also charged with “securities fraud” by the Texas Securities Commission, claiming that it had been bankrupt or near bankruptcy for several months.

Subsequently, FID officially took action against Prime Trust starting on the 23rd of this month. Potentially affected by this injunction, cryptocurrency custody company BitGo also announced its withdrawal from the provisional agreement to acquire Prime Trust.

After being abandoned by regulatory agencies and potential acquirers, once-prominent Prime Trust has gradually come to the brink of bankruptcy. Currently, the company has stopped all cash and cryptocurrency deposits and withdrawals and faces the risk of bankruptcy liquidation. In addition, crypto companies that have placed assets in Prime Trust also face uncertain risks and futures.

Prime Trust’s sudden closure triggers a chain reaction

Prime Trust’s sudden closure has also caused ripples in its customer base. If Prime Trust really cannot escape the fate of bankruptcy, then related crypto companies will also not be spared.

Securitize, a blockchain company that saves investor cash deposits for Prime Trust’s trading platform, said that some functions are currently suspended and will transition to a new custodian as soon as possible, and will ensure customer safety; Estonian crypto exchange Coinmetro also stated on its official social platform that it is currently unable to process new dollar transactions due to Prime Trust’s suspension of deposits and withdrawals.

In addition, Swan Bitcoin, a financial advisor platform service company, listed Prime Trust as a custodian and listed all tokens of the TradeFi financial advisor platform as being held by Prime Trust. Swan Bitcoin has now revealed that it plans to terminate the agreement with Prime Trust.

Although Prime Trust has not publicly disclosed its specific custody amount, official data shows that Prime Trust’s custody service client base covers a wide range of financial and technology industries, including but not limited to digital asset exchanges Bitstamp, Bittrex Global, OKCoin, Zilliqa, etc.; Security issuance platforms Securitize, Harbor, SeriesOne, etc.; Real estate investment platforms RealBlocks, Elevated Returns, etc. If Prime Trust fails to fulfill its custody responsibilities, clients’ assets may be lost or frozen. In addition, if Prime Trust goes bankrupt, its clients may not be able to continue to use its custody services.

In addition, if Prime Trust goes bankrupt, its customers may be protected by FDIC insurance, which is regulated by the Federal Deposit Insurance Corporation (FDIC) and the Nevada Financial Services Bureau, with a maximum insurance amount of $250,000 per customer.

Will it affect TUSD (TrueUSD)?

After Prime Trust suspended deposits and withdrawals, TrueUSD informed customers with related accounts in an email that they would be unable to mint or redeem the stablecoin TUSD during the period of Prime Trust’s suspension of operations. Since Binance began promoting it heavily on its platform, TrueUSD has gone from an unknown stablecoin project to mainstream visibility, and its market share has grown rapidly. According to Coinmarketcap data, as of the time of publication, 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 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. At the beginning, the US dollar reserves behind TrueUSD were held by Prime Trust. However, TrustToken has now established partnerships with other custodians to reduce the risk of TUSD caused by the bankruptcy of a single custodian.

Previously, TrueUSD encountered FUD because of the suspension of Prime Trust’s minting of TUSD. TrueUSD quickly responded on social media, “The TUSD minting and redemption services are not affected and will continue to operate as usual,” and the price of TUSD subsequently returned to normal.

In recent days, during a series of fluctuations in which Prime Trust stopped being acquired by BitGo, was under review by Nevada regulators, and suspended deposits and withdrawals, TUSD seemed to be unaffected. TrueUSD clarified once again that it will maintain multiple channels for minting and redeeming US dollars.

According to the reserve report released today, TUSD has $26,434 in funds held at a U.S. deposit-taking institution that has been ordered to stop withdrawals, of which $26,269 is related to customer withdrawals and redemptions, but it does not specify which U.S. institutions hold the funds. We can boldly speculate that the institution is most likely Prime Trust, and such a small amount of funds held is negligible compared to the total issuance of TUSD of $3.13 billion.

Currently, the size of the exposure is still unclear. Although TUSD had previously stated that there was “no exposure” to Prime Trust, if Prime Trust applies for bankruptcy protection, the most likely impact would be on restricted issuance of TUSD. Additionally, the process of exchanging TUSD for US dollars or other currencies may be restricted or delayed, causing inconvenience to TUSD holders. Furthermore, if TUSD’s issuance is restricted or the exchange process is delayed, it may increase uncertainty in the market about TUSD, leading to price fluctuations.

Although Prime Trust has been heading towards the abyss step by step, it has not had an impact on the development of TUSD. On the contrary, TUSD’s supply increased from slightly over 2 billion US dollars on June 14 to 3.13 billion US dollars on June 21, an increase of 56.5%, in the week prior to Bitcoin breaking through the $30,000 mark.

Summary

After experiencing the bankruptcy year of FTX in 2022 and the ups and downs of the cryptocurrency industry this year, such as the bankruptcy of Silvergate and Signature Bank, and the litigation of Binance and Coinbase by the SEC, major cryptocurrency companies have quietly strengthened their ability to resist risks and prepared for “black swan events” at all times.

Prime Trust is currently on the brink of bankruptcy. Currently, the official has not commented on this, but its creditworthiness in the cryptocurrency industry has clearly dropped to the “freezing point”. Whether there are still industry institutions at this moment who can extend an olive branch to save it from the fire and water; or whether another small storm will become the last straw that breaks the camel’s back?

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