Prime Trust lost $8M after Terra collapsed; bought $76M ETH in unrelated wallet loss

Failed crypto custodian Prime Trust revealed new details about its past financial shortfalls in a filing submitted to bankruptcy courts on Aug. 24.

That filing indicates that Prime Trust’s investment in the TerraUSD (USTC) stablecoin resulted in millions of dollars of losses for the company. Specifically, the company’s investment in the now-failed stablecoin led to the loss of $6 million of client funds and $2 million of treasury funds, amounting to a total loss of $8 million.

The filing also notes that the “crypto winter” of summer 2022, which occurred around the time of Terra’s collapse and led to industry-wide liquidity losses, resulted in reduced revenues. Prime Trust continued to spend money despite declining revenue: in October 2022, the company’s spending resulted in net losses of $7.4 million, and in November 2022, its spending resulted in net losses of $8.4 million.

Prime Trust additionally said that it purchased $76.4 million worth of Ethereum (ETH) in order to cover customer withdrawal requests after it lost access to certain funds.

That issue occurred after Prime Trust moved its crypto to the storage service Fireblocks in July 2019. After migrating addresses, Prime Trust accidentally instructed users to send funds to a crypto address no longer in use, leaving the firm unable to access those funds. Prime Trust had to purchase new cryptocurrency to cover user withdrawals.

Prime Trust also attempted to raise funds but was unable to become profitable again.

Prime Trust’s wind-down began months ago

Prime Trust began to halt its operations earlier this summer. Nevada regulators asked for the firm to be placed in receivership on June 27. Courts later ordered the firm into receivership on July 18. Prime Trust filed for bankruptcy on Aug. 14.

In its current filing, Prime Trust said that it had $82.8 million in fiat deficits and $861,000 in cryptocurrency deficits at the time of its failure, in line with previous reports.

Though the broader details of Prime Trust’s failure were publicized in June, the latest filing provides more detailed information about the amount at play.

Prime Trust, LLC, a prominent player in digital asset custody, has filed voluntary petitions for Chapter 11 bankruptcy.

According to a report released by the company on Aug. 14, the proceedings are expected to provide a “transparent and value-maximizing process for the benefit of its clients and stakeholders.”

The Nevada-based company is known for its innovative services in digital asset management. As reported on July 18, Nevada courts ordered Prime Trust into temporary receivership, signaling the serious financial difficulties it faced.

The company’s financial deficit in July reportedly exceeded $82 million. As of the Chapter 11 filing, the consolidated list of the top 50 unsecured creditors totals $144 million.

Further, across four filings for Prime Trust group companies, Prime Core Technologies Inc., Prime Digital, LLC, Prime IRA LLC, and Prime Trust, LLC, there are liabilities recorded to be $100 million and $500 million, and assets between $50 million and $100 million.

Source: Chapter 11 filing

The potential impact on the industry could be significant, given its pivotal role in providing custodial services to institutional crypto investors.

Prime Trust is a ‘qualified custodian,’ meaning that all customer custodied assets should be protected from the bankruptcy of the custodian. CryptoSlate has reached out to Prime Trust who confirmed “No further statement is available at this time,” directing interested parties to “additional information, including court filings and other information related to the court-supervised proceedings […] available: (a) free of charge by visiting the Debtors’ restructuring website at https://cases.stretto.com/primetrust.”

Chapter 11 decision.

The decision to file for Chapter 11 bankruptcy follows the permanent appointment of former banking executive John Guedry as receiver for the company. Guedry, along with John Wilcox and Michael Wyse, form a special restructuring committee with the authority to oversee the company’s ongoing bankruptcy cases.

As the company continues to operate as “debtors-in-possession,” it intends to file several motions with the Bankruptcy Court to facilitate the “orderly evaluation of all strategic alternatives.” These measures could potentially include selling the company’s assets and operations as a going concern.

Prime Trust’s financial crisis, initiated nearly a month before the receivership order, has ripple effects within the crypto industry.

It began with the Nevada Financial Institutions Division (NFID) issuing a cease and desist order on June 21 due to the company’s inability to fulfill customer withdrawal requests.

This was shortly followed by the bankruptcy declaration of Prime Trust subsidiary Banq on June 14 and the termination of BitGo’s planned acquisition of Prime Trust on June 22.

Further details related to the court-supervised proceedings will be made available as the proceedings unfold. They can be accessed on the DDebtors’restructuring website.

Aug. 16, 2 PM GMT: Updated to include Prime Trust comments.