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Regulators in Nevada are moving to shut down troubled cryptocurrency custodian Prime Trust after determining that the firm was so financially underwater that it would not be able to service customers anymore.
On Tuesday, the Nevada Financial Institutions Division submitted a filing to the Eighth Judicial District Court in Las Vegas that called for a freeze on all Prime Trust’s business activities. The regulator also called for the appointment of a receiver to manage the business in place of its current management. A receiver is an outside entity appointed to handle operations at an insolvent financial institution until all of its assets are sold, and claims against it are resolved.
According to the filing, the crypto custodian has fallen heavily into debt due to problems years in the making.
The Nevada regulator alleges that in January 2021, Prime Trust began reintroducing "legacy wallets" to customers after it moved its systems to digital asset security platform Fireblocks two years earlier. However, by December 2021, Prime learned that it could not access these wallets and the cryptocurrencies they held. From then until March 2022, FID said the company began buying digital assets using customer funds to meet withdrawal demands from clients.
As a crypto custodian, Prime Trust's core business revolved around safeguarding clients’ funds and assets. Investment activities are usually handled on behalf of customers.
What FID found was that Prime owed massive debts in fiat and crypto currencies to clients. In total, the regulator said that Prime Trust owed more than $85 million in fiat with only about $2.9 million on hand. In terms of cryptocurrencies, Prime Trust owed about $69.5 million with a little over $68.6 million available to it.
This situation was not deemed sustainable by the regulator. According to FID, Prime Trust is in an "unsafe financial condition and/or is insolvent." It added that the company's position will likely worsen as more customers continue to withdraw their funds. For this reason, the FID requested Prime Trust be placed in a receivership.
Prime Trust did not immediately return Decrypt’s request for a comment.
This move follows a cascade of bad news for the lender. On June 14, a Prime-owned subsidiary, Banq, filed for bankruptcy in Nevada following allegations of mismanagement and legal woes.
Two days later on June 16, another blow came when crypto investment company Abra was hit with a cease and desist order from Texas regulators, and accusations of securities fraud. Prime Trust acted as the main custodian from Abra, who is said to have had $49 million in assets under management (AUM) as of May.
Last week, FID precipitated its move to wind down the company by issuing it a “cease and desist” letter on June 21, prompting a pause in customer withdrawals.
Shortly after this, rival custodian BitGo announced that it was walking away from acquisition talks that began only two weeks earlier on June 8. The company did not specify the reason for ending talks in a brief tweet, but said the decision was "not made lightly.”