Prime Trust bankruptcy spotted by crypto community months ahead

Months before Prime Trust filed for Chapter 11 bankruptcy, online sleuths in the crypto community were on the case and continue to follow the money.

Crypto custodian Prime Trust filed for Chapter 11 bankruptcy in the United States state of Delaware on Aug. 14 after reporting shortfalls in customer funds. Prime Trust said it’s working with 25,000 to 50,000 creditors and has liabilities of up to $500 million. 

Although the news of the company’s financial instability broke mid-way through August, members of the crypto community months had already flagged the company’s shaky position weeks before the filing.

On June 27, the business regulator in the state of Nevada issued a cease and desist order to Prime Trust after it alleged the custodian had a shortfall of customer funds and couldn’t honor customer withdrawals.

Cryptocurrency exchanges BitGo and CoinMetro posted on X (formerly Twitter) about service disruptions at the hands of Prime Trust during that time period.

Members of the crypto community immediately responded to these updates, with one user claiming Prime Trust was “going bust” on June 22.

Although recent events suggest that community members’ concerns were correct, on June 22, the founder and CEO of CoinMetro, Kevin Murcko, said in direct response to the posts that he wouldn’t count on “insolvency” for Prime Trust just yet. 

Others responded to the conversation and called Prime Trust a “Ponzi scheme” or mocked the idea of the halt on withdrawals being “temporary.” 

And, following reports that the crypto custodian had filed for bankruptcy, one user resurrected another community member’s post that had signaled Prime Trust’s difficulties almost two months ahead of the news in June:

However, Prime’s faltering can be traced even further back to 2019 when it had Fireblocks, an institutional digital asset custody provider, to store all of its crypto assets, according to a claim from the Financial Institutions Division. 

In Jan. 2021 it reintroduced legacy wallet forwarding addresses to clients due to “limitations” with Fireblocks and has allegedly not had access to legacy wallets since Dec. 2021, according to previous reports.

After the official news of Prime Trust’s bankruptcy broke, the internet crypto community began to voice new suspicions. 

Related: TrueUSD assures users it has no exposure to troubled Prime Trust

On Aug. 14, one user called out the financial service provider Fold — which issues Bitcoin (BTC) rewards debit cards and operates a Bitcoin-backed shopping app — for its choice to switch to the custodian Fortress back in June when Prime Trust began to show signs of instability. 

Fold asked users to agree to “Fortress Account” terms in its notice of switching custodians. The user pointed out that Fortress Trust was created by the same person who set up Prime Trust.

Prime Trust was founded in 2016 by the entrepreneur Scott Purcell, who left the company in 2021. That same year, Purcell created Fortress Trust, with rumors surfacing that he no longer held any equity in Prime. 

At the time of Prime Trust’s initial troubles in June, prior to the bankruptcy, Purcell commented that Fortress had no exposure to his former company.

Aside from Fold, Fortress also acts as a custodian for the fiat on-ramp Coast and the automated investment app Soon — among others. 

Over the last year, the crypto space has been plagued with bankruptcies. The list of troubled companies includes FTX and Celsius, as well as Prime Trust and its payment subsidiary Banq, which also filed for bankruptcy on June 14.

Collect this article as an NFT to preserve this moment in history and show your support for independent journalism in the crypto space.

Magazine: Deposit risk: What do crypto exchanges really do with your money?

Leave a Reply