Virtual currency custody solutions provider Prime Trust has filed for Chapter 11 bankruptcy following a liquidity crisis that community members say has been brewing for several months.
The company filed on August 14, noting that the bankruptcy procedure will “provide a transparent and value-maximizing process for the benefit of the Company’s clients and stakeholders.”
According to the filing document, Prime Trust says it currently has liabilities in excess of $500 million from 50,000 customers. The filing revealed gaping shortfalls in customer funds that led Nevada regulators to issue a cease-and-desist order against Prime Trust, placing the company into receivership in June.
Per the filing, Prime Trust disclosed that it is open to a range of options to make affected customers whole, including the sale of assets. Apart from grappling with settling customers, Prime Trust remarks that it will continue to pay remuneration for its employees in the hopes of emerging “as a going concern.”
Prime Trust’s liquidity issues do not surprise several industry participants, as the earliest cracks began appearing early in the year. Virtual currency service providers BitGO and CoinMetro raised alarm over Prime Trust’s operational issues in June. Still, others are pointing to the firm’s rocky partnership with Fireblocks in 2021 as the earliest signs of crisis.
As the firm’s troubles came to light, several pundits accused the firm of operating a Ponzi scheme, hinting at their theories on the financial troubles of its subsidiaries. The Nevada Financial Institutions Division (NFID) seemingly confirmed their fears following a June 22 announcement that it was investigating the firm for “breaching its fiduciary duties to its clients.”
“Looks like a bunch more people are going to be getting in line in bankruptcy court,” predicted an X user. “Prime Trust is going Prime Bust. The real question is how long has the money been missing, and where did it go?”
Following the rough patch faced by Prime Trust, virtual currency service providers relying on the firm for custody solutions moved to withdraw assets while assuring customers of the safety of their funds. However, Coinbits raised the alarm over its inability to recover funds with Prime Trust, stating that claims of regular audits and strict regulatory compliance misled it.
An avalanche of bankruptcies
The cryptoverse has gone through several high-profile bankruptcies in the last 12 months, triggering greater regulatory scrutiny and bearish sentiments. Celsius and Three Arrow Capital (3AC) triggered the wave of bankruptcies, dragging several entities underwater.
As the year wore on, Genesis, BlockFi, Voyager Digital, and mining firm Core Scientific joined the list of digital asset companies with debilitating liquidity crises. The most poignant of bankruptcies was FTX’s collapse in November 2022 which led to losses running into billions for unsuspecting users.