Prime Trust filed for Chapter 11 bankruptcy in the state of Delaware, United States, on August 14 after reporting deficiencies in consumer funds. Prime Trust reported working with 25,000 to 50,000 creditors and having up to $500 million in liabilities.
Even though the news of the company’s financial instability emerged in the middle of August, members of the crypto community had already signaled the company’s precarious position weeks prior to the filing.
Prime Trust files for bankruptcy
Prime Trust, based in Las Vegas, filed for Chapter 11 bankruptcy protection on Monday, marking the latest setback for the beleaguered financial technology company.
The bankruptcy filing follows the receivership of Prime Trust by Nevada regulators at the end of June, who determined the company was insolvent and unable to service customers. This action was taken following a year of difficulties for Prime Trust and its affiliated companies.
Prime made headlines in June when rival crypto custodian BitGo signed a letter of intent to acquire the company, only to back out two weeks later. BitGo gave no rationale for terminating the agreement.
In the following month, Banq, a subsidiary of Prime, filed for bankruptcy due to alleged malfeasance by former CEO Scott Purcell. And Prime Trust partner Abra was issued a cease and desist order in Texas due to allegations of securities fraud.
Prime Trust’s operations were terminated by the Nevada Financial Institutions Division (NFID) as the ultimate blow. The NFID stated that it was “actively monitoring the solvency of Prime Trust in anticipation of a potential acquisition or merger,” but that the company had “breached its fiduciary duties to its clients, in violation of Nevada trust laws.”
According to officials, Prime inappropriately used user cash to pay withdrawals since December 2021 after losing access to some consumer crypto wallets.
According to a regulatory filing, Prime owed over $82 million to customers due to missing fiat currency deposits, despite having $68 million in digital assets under custody. However, a study revealed that the majority of those monies were kept in an illiquid token rather than Bitcoin.
Other crypto companies that had funds with Prime hurried to reassure customers and withdraw their assets following the cease and desist order. However, some companies, such as Coinbits, still retained customer funds with the bankrupt custodian.
Prime Trust was a disaster waiting to happen
The bankruptcy filing came as no surprise to the crypto community. After the BitGo announcement, members of the crypto community responded immediately to these updates, with one user alleging that Prime would “go bankrupt” on June 22.
Although recent events indicate that community members’ concerns were warranted, Kevin Murcko, founder, and CEO of CoinMetro, stated on June 22 that he would not rely on Prime Trust’s “insolvency” just yet.
Others responded to the discussion by labeling Prime Trust a “Ponzi scheme” and ridiculing the notion that the withdrawal freeze was “temporary.”
And, following reports that the crypto custodian had filed for bankruptcy, one user resurrected another community member’s post that foretold Prime Trust’s difficulties nearly two months before the June news:
According to the Financial Institutions Division, Prime’s decline can be traced even further back to 2019, when it used Fireblocks, an institutional digital asset custody provider, to store all of its crypto assets.
Due to “limitations” with Fireblocks, it reintroduced legacy wallet relaying addresses to clients in January 2021. According to previous reports, it has not had access to legacy wallets since December 2021.
As soon as the news of Prime Trust’s bankruptcy became formal, the internet crypto community began to express new suspicions.
One user criticized the financial service provider Fold, which issues Bitcoin rewards debit cards and operates a Bitcoin-backed shopping app, on August 14 for its decision to transfer to the custodian Fortress in June, when Prime Trust began to show signs of instability.
In its notice of switching custodians, Fold required users to accept “Fortress Account” terms. The user noted that Fortress Trust was established by the same individual who established Prime Trust.
The entrepreneur Scott Purcell founded Prime Trust in 2016, and he departed the company in 2021. In the same year that Purcell established Fortress Trust, rumors circulated that he no longer held equity in Prime.
Purcell stated that Fortress had no exposure to his former company at the time of Prime Trust’s initial difficulties in June, prior to its bankruptcy.
The crypto space has been ravaged by bankruptcies over the past year. On the list of troubled businesses are FTX and Celsius, as well as Prime Trust and its payment subsidiary Banq, both of which filed for bankruptcy on June 14.
