On June 8, 2023, my colleague Ian Allison reported that BitGo, a crypto custodian that’s vacuumed up other companies in the past, had begun the process of acquiring Prime Trust, a fellow custody provider.
On June 22, i.e. two weeks later, BitGo walked away from this deal.
That same day, rumors emerged that the state of Nevada had filed a cease-and-desist against Prime Trust, which the state later confirmed by publishing an order which alleged it had a massive deficiency of customer funds and indeed may be insolvent.
Four days after that, the state of Nevada took things a step further, filing for receivership (basically asking for court approval to take over the company) and alleging that Prime Trust a) owed clients about $82 million in fiat that it didn’t have access to and b) lost access to certain crypto wallets in 2021 and so was using customer fiat funds to buy crypto to meet withdrawal requests.
This filing, which was made public on Tuesday, is pretty alarming. It’s got sign-off from Prime Trust’s interim CEO and board, indicating the company is cooperating with the state Financial Institutions Division.
It’s also worth noting that Prime Trust has changed leadership a few times since its founding. The allegations indicate that the custodian used wallets it lost access to in 2021, prior to the current interim CEO’s appointment.
Still, this appears to be the first time these revelations are being publicly disclosed, and the implications are serious.
One of these implications ties to the possible impact to TrueUSD, a stablecoin whose issuer said on June 22 it had “no exposure” to Prime Trust before later acknowledging it had a relatively small amount ($26,000) on the custodian.
Rumors that TrueUSD use Prime Trust to mint and redeem tokens have persisted though, and the token even depegged on Binance.US on Wednesday.
Lawmakers are already paying attention to stablecoin issues, and a bill addressing this sector of the crypto industry is still the most likely to pass through the House before other legislation, so I imagine Congress will take notice if one of the world’s largest stablecoins continues to have issues.
And regulators will of course be paying attention to issues by a regulated custodian.
