Is crypto asset custody difficult? ── What is the negative impact of Prime Trust’s failure on the industry | CoinDesk JAPAN

The infamous Mt.Gox, the lesser-known Quadriga, and several other crypto assets (virtual Evidence has accumulated over the years that cryptocurrency custody is fairly difficult (by companies). And on June 27th, another piece of that evidence piled up.

Rapid development after breakup of acquisition negotiations

Crypto asset custody giant BitGo ended talks to acquire rival Prime Trust on the morning of June 22nd. By that afternoon, Nevada regulators had ordered Prime Trust to cease all activity, citing the company’s “overall financial condition was significantly deteriorating.” And yesterday, Nevada regulators applied to place Prime Trust in trusteeship.

This case has exploded for seemingly good reasons. Prime Trust has $85 million (approximately ¥12 billion, at an exchange rate of ¥140 to the dollar) in fiat currency entrusted to it by its customers. And he is said to have only about $3 million on hand. The company also has $69.5 million worth of crypto in custody and $68.6 million in crypto on hand.

It’s not just the discrepancy in the numbers that is noteworthy, but how Prime Trust got into such a funding shortfall.

Prime Trust is no longer able to access “legacy wallets,” according to Nevada regulatory filings. Until 2020, Prime Trust managed customers’ crypto assets in their own wallets. However, in 2020, it moved client assets to Fireblocks’ non-custodial custody platform.

And in 2021, after a change in Prime Trust management, they set up what they called a “legacy wallet transfer” for their customers, and after Fireblocks had a problem with their platform, they transferred Prime Trust’s old pre-2020 wallets. I had the money sent back. This turned out to be a big mistake.

Prime Trust realized in December 2021 that these “legacy” wallets were no longer accessible. Then, I ran to the shocking response described in the submitted documents.

“Between December 2021 and March 2022, Prime Trust purchased digital currency using customer funds in ‘Bulk Customer Accounts’ to support withdrawals from inaccessible legacy wallets.”

Can’t trust your custodian?

There are two big points here.

First, it is incomprehensible that a custodian like Prime Trust cannot access the wallet. The essence of custody services is to pay money and have them custody better than you. This incident completely undermines the claims and business case of third-party custodians. In other words, it undermines the argument that people should trust custodians because they are neither smart nor brave enough to store their own crypto assets. It seems the Prime Trust was no expert after all.

And let me tell you first, Prime Trust is not a second-rate company. Prime Trust was known as a legitimate young company with a bright future. Last year, it raised over $100 million in funding rounds including FIS, Fin Capital, Mercato Partners and Kraken Ventures, and has cryptocurrency companies such as Swan Bitcoin and Coinbits among its clients. .

Second, and this is the biggest question, how difficult is it to store crypto assets for others?

It should be simple. You give me your crypto and I store it for you. I will return the crypto to you when you want and you will pay me for the service.

In the world of self-custody, this is something that even an individual can achieve. For any sophisticated company that can raise ten billion dollars in venture capital, it should be a piece of cake.

The Prime Trust story is still ongoing and we will refrain from making final judgments until we know the full story, but there are a few things we need to clarify.

How did this happen? What exactly is the ‘additional digital currency’ that Prime Trust allegedly purchased with customer funds? Was Prime Trust trading cryptoassets in the hope that it would cover the difference and repay customers without delay?

If so, this story will enter a whole new world. The counterparty risk with custodians should be that the custodian may lose your crypto, and after the custodian loses your crypto, try to get it back in one transaction. It should not be an additional risk such as that associated with

Negative impact on the industry as a whole

All in all, this is bad news, and not just for Prime Trust customers. To be honest, it gives the impression that such fundamental failures are the norm, not the exception, in the world of cryptocurrencies.

Aside from the financial loss, the bigger issue is the Prime Trust cover-up that was revealed during failed acquisition talks (who was at the negotiating table going to be duped? How?).

Crypto-assets have a reputation for being suspicious, but another new example of suspicious behavior has emerged. Given Prime Trust’s reputation as a solid company, I can’t help but wonder what other companies (even trustworthy ones) are treating their users’ deposited funds irresponsibly.

There may be other companies that are irresponsible. I hope not. But in a bull market where obscure tokens could go up 100x or 1000x, some companies might have survived by doing just that.

The problem for the industry is that stories like Mt.Gox, Quadriga and FTX dominate the industry’s reputation and cast doubt on even the best of the best.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
| Image: Prime Trust CEO Tom Pageler (Prime Trust)
｜Original: Apparently It’s Very Difficult to Custody Crypto