By Landon Manning
Following months of beleaguered financial operations, Nevada-based crypto custodian and digital assets firm Prime Trust has filed for Chapter 11 bankruptcy.
Although far from the largest business of this sort in the international cryptocurrency ecosystem, Prime Trust was a fairly high-profile firm, making headlines with its 2022 funding round of more than $100M and generally dealing with revenue streams in the tens of millions of dollars. Still, as is so often the case in the world of Bitcoin, operations that at first glance appear to be wildly successful can end up cratering dramatically once cracks begin to appear. Such appears to be the case with Prime Trust, as it announced this filing in mid-August. But what caused it? And what implications will this have for the markets as a whole?
Prime Trust filed for bankruptcy in the state of Delaware on August 14th, appointing a Special Committee to liquidate all its assets in a transparent and orderly manner. Regulators claimed upon looking at the company’s books that some $82M in customer deposits had come up short, a problem compounded by the fact that a significant portion of the company’s crypto reserves were not in Bitcoin or some other widely-tradable currency, but in illiquid tokens. Further digging, however, has shown that Prime Trust’s total liabilities across its subsidiary companies might go as high as $500M. Considering that Prime Trust had a large number of institutional clients for its custody services, there are concerns that this bankruptcy could destabilize the industry.
However, as many commentators have pointed out, signs of impending collapse at Prime Trust have been clearly visible for months. In early June, Prime Trust was in serious talks with fellow digital asset trust firm BitGo to be acquired by this company. This deal seemed likely to go through, especially with Prime Trust’s partner Banq declaring bankruptcy during contract negotiations. If Prime Trust was simply on its last legs, its knowledge and infrastructure could profitably be added on to the resources at BitGo. However, after these negotiations, BitGo pulled out of the deal altogether.
This came alongside news that Prime Trust had frozen withdrawals, and that the Nevada Financial Institutions Division (NFID) issued a cease and desist order on June 22 demanding that Prime Trust not accept fiat or cryptoassets from any new clients. With the company’s last major lifeline in the form of BitGo abandoning them, Prime Trust saw few further developments except the NFID’s July court order that Prime Trust be placed under temporary receivership. In other words, Nevada state officials were put in charge of the firm’s operations. Rumors mere days before the bankruptcy filing claimed that up to 75% of the workforce may be laid off, but the company instead faces total dissolution.
Although several specific clients have been named as major creditors, some being owed tens of millions of dollars from Prime Trust, a lingering question remains: how exactly did the firm’s money disappear? Analysis of Prime Trust’s actual assets holds a vital clue, as the books show only $7.5M in Bitcoin in reserve next to a $61.5M stockpile of AUDIO, tokens issued by a decentralized streaming service that add up to about a third of the tokens’ entire supply. In other words, an overwhelming majority of worthless assets. Such figures as this can only come at the climax of an extended period of mismanagement and willful fraud, like the collapse of FTX in a similar token-trading scheme. More details will surely come upon closer inspection of Prime Trust’s books.
Still, although this news is a significant upset, it does not appear to have yet caused a major reverberation in the crypto market. Bitcoin’s price has remained stable, and the largest news from any other crypto custody firm is success: BitGo’s funding round of $100M. After BitGo pulled out of the deal two months prior, did it and other firms conduct damage control? Have exchanges and asset managers insulated themselves from each other, after FTX? Maybe this is just an advantage of Bitcoin’s instability, as investors can expect and prepare for surprises good and bad. After all, when the dust settled, Bitcoin was the most valuable asset left on Prime Trust’s books. We will surely get answers to these questions as the story develops, but for right now, confidence in Bitcoin seems sturdy as ever.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.