Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
Prime Trust’s Financial Failure and Shift Towards ‘No-Custody Solutions’
Decrypt | Andrew Throuvalas| Jun 28, 2023
Image: Pexels/RDNE Stock project
The fallout from Prime Trust's failure has highlighted the risks associated with crypto companies relying on third-party custodians for asset safety.
- Prime Trust was placed into receivership due to financial issues, with the State's filing indicating that Prime Trust is over $82 million in the hole from fiat liabilities. Crypto companies partnered with Prime Trust are addressing concerns about the safety of customers' assets following the custodian's failure.
- Coinbits, a platform for buying, selling, and automatically saving in Bitcoin, has had to suspend most of its services. Despite this, Coinbits claims that Prime Trust still has enough Bitcoin to honor their members' balances and plans to move towards a "no-custody solution" in the future.
- Swan Bitcoin, another Bitcoin financial services company, withdrew all assets from Prime Trust weeks in advance of the custodian's fallout. All Swan clients' assets now rest with Fortress, a crypto custodian led by Scott Purcell, the same CEO that led Prime Trust until January 2021.
See: Bloomberg Invest: Banking and Blockchain Conversation with Former SEC Chair Jay Clayton and Dan Morehead of Pantera Capital
- Implications:
- The fallout from Prime Trust's failure has highlighted the risks associated with crypto companies relying on third-party custodians for asset safety. This could lead to a shift in the industry towards "no-custody solutions", as indicated by Coinbits' future plans.
- The situation also raises questions about the potential for "clawbacks" during Prime Trust's bankruptcy process.
- This could have significant implications for companies like Swan, which withdrew assets before Prime Trust's collapse. However, Swan's CEO Cory Klippsten has asserted that such clawbacks would be illegal and against precedent, indicating a potential legal battle ahead.
- Klippsten denied that Swan knew Prime Trust was insolvent before withdrawing, saying that the firm had been preparing to migrate away from the custodian for 9 months.
Swan CEO Cory Klippsten via DM:
I don't think having the ledger/custody on the broker side is the answer because I expect regulations soon forcing the separation of brokerage and custody, which is required for the rest of the financial industry and is the best legal setup for users.
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