With the infamous Mt. Gox, less-infamous Quadriga, and a handful of other times crypto companies have entered mainstream awareness for losing millions of dollars of customer funds, we have years of evidence that custodying crypto is apparently quite difficult. Yesterday, crypto custody giant BitGo terminated its acquisition of rival Prime Trust, and Nevada’s Financial Institutions Division (FID) ordered Prime Trust to cease all activities, alleging the company’s overall financial condition had considerably deteriorated. Nevada’s FID then filed to place Prime Trust into receivership.
Prime Trust allegedly owes its clients $85 million in fiat, and has about $3 million in fiat currency on hand. The company also owes a further $69.5 million in crypto, and has $68.6 million in crypto on hand. It appears that Prime Trust had turnover in its management team in 2020, and set up something called legacy wallet forwarding for clients and had funds sent back to Prime Trust’s old pre-2020 wallets, after issues on the Fireblocks platform. In December 2020, Prime Trust discovered that it was unable to access those legacy wallets. The filing states that It is understood that from December 2020 to March 2021, to satisfy the withdrawals from the inaccessible Legacy Wallets, Prime Trust purchased additional digital currency using customer money from ‘omnibus customer accounts.’
This incident raises questions about the reliability of third-party custodians, and the counterparty risk associated with them. Prime Trust was known to be a legitimate, young company with promise, having raised over $100 million in a funding round last year that included FIS, Fin Capital, Mercato Partners, and Kraken Ventures, and counting several crypto firms including Swan Bitcoin and Coinbits as clients. This raises the question of how difficult it is to custody crypto for others, and whether other companies may be playing fast and loose with user deposits.
The issue for the industry is that stories like Mt. Gox, Quadriga, and FTX dominate its reputation, casting doubt even on the good firms. And telling people to watch their backs just won’t work.