Prime Trust Filing Reveals Cascade of Failures That Led To Bankruptcy Filing

Irresponsible spending. Misjudging summer 2022's crypto market implosion. Getting locked out of its own cryptocurrency wallet. These are some of the missteps detailed in a court filing submitted by battered crypto custodian Prime Trust as it seeks bankruptcy protection. 

In a filing with the U.S. Bankruptcy Court in Delaware on Thursday, Prime Trust CEO Jor Law explained how the company was battered by a combination of the collapsing cryptocurrency market and a management team that failed to change course amid the plunge. Instead, Law—who became interim CEO last November—said the company’s previous leaders doubled down on spending at a time when revenues were strained.

According to Law, Prime Trust spent about $10.5 million in October against revenues of about $3.1 million, giving it a net-loss of over $7 million. A month later, the spending rose again to $11.1 million, costing it another net loss of about $8.4 million.

Among the events that hit the company directly last year was the collapse of TerraLUNA last May after the failure of Terra’s UST stablecoin and LUNA governance token. Law said that Prime Trust put $6 million in client funds and $2 million from its own treasury into Terra before it failed. 

In another egregious incident, the company detailed how it locked itself out of its own cryptocurrency wallet.

Under the subheading "The Wallet Event," Low detailed how company executives used a "cold storage wallet" for holding onto tokens, including ETH and ERC-20 compliant coins. One wallet, described as a "98f Wallet," was set up in March 2018 as a device that required physical posession as well multiple signatures to access.

The physical wallet was one of many solutions enlisted by Prime Trust—described as "legacy" wallets—before the company became a customer of Fireblocks in the summer of 2019. Fireblocks touts "enterprise-grade platform delivering a secure infrastructure for moving, storing, and issuing digital assets."

However, according to the filing, new management subsequently decided to resume deposits of Prime Trust’s customer assets into legacy wallets, at which point those assets became unrecoverable. The firm only learned of the mistake when an unidentified customer requested a large ETH withdrawal that the company could not fulfill.

Prime Trust soon learned that it no longer had the physical devices—engraved Cryptosteel plates—needed even to access the old wallet. Crypto analysis firm Arkham claims to have identified the wallet on the blockchain, estimating it holds over $45 million in assets today.

Although assets held with Fireblocks technology were always accessible, Law said Prime Trust still has no access to the 98f wallet. As a workaround, Law said “certain company employees" began using fiat currencies from its client accounts to purchase ETH and meet withdrawal requests from December 2021 to March 2022, using over $76 million to fund them. 

Prime Trust’s problems gradually spiraled from there. In June, two Prime Trust partners were targeted by state securities regulators, and the company itself saw a merger deal with crypto custodian BitGo collapse only two weeks after being signed. 

On June 27, Nevada regulators moved to shut down Prime Trust after they learned the company owed massive debts in fiat and cryptocurrencies to clients. Officials 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 at the time.

After being initially placed into receivership, Prime Trust ultimately filed for bankruptcy on August 14.

Editor's note: This article has been updated to clarify that assets stored with Fireblocks remained accessible.