Crypto Custodian Prime Trust Files for Chapter 11 Bankruptcy Protection

Updated: 15 August 2023

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Crypto custodian Prime Trust has filed for Chapter 11 bankruptcy protection.

The filing comes after Nevada’s Department of Business and Industry issued a cease and desist order to the company on June 21, citing critical deficiencies in its financial condition. The order stated:

On or about June 21, 2023, Respondent’s [Prime Trust] was unable to honor customer withdrawals due to a shortfall of customer funds caused by a significant liability on the Respondent’s balance sheet owed to customers.

And on June 26, Nevada’s regulator petitioned the court to place Prime Trust into receivership, a move that was approved on July 18.

Nevada Financial Institutions Division files a petition to place Prime Trust LLC in receivership with the Eight Judicial District Court of Nevada. Read the full release and find a copy of the petition here: https://t.co/1A1NzChBGx pic.twitter.com/78vaHKrhPu

— Nevada Department of Business & Industry (@NevadaDBI) June 27, 2023

The regulatory filing underscored the urgent need to protect customers and the public interest and expressed concerns about the company’s worsening financial condition and insolvency. It stated:

Prime is in an unsafe financial condition and/or is insolvent. Additionally, Prime’s condition will only progressively worsen as customers continue to withdraw from Prime.

Prime Trust: Financial Snapshot and Acquisition Fallout

At the time of the court petition, Prime Trust faced a substantial deficit between its assets and liabilities. The company owed over $85 million in fiat to its clients, yet its available funds totaled only around $2.9 million. Similarly, in the realm of digital assets, Prime Trust’s liabilities amounted to about $69.5 million, with digital holdings around $68.6 million.

Further complicating matters, the payments subsidiary of Prime Trust, Banq, filed for bankruptcy protection on June 13, with assets of $17.72 million and liabilities of $5.4 million. This subsidiary’s bankruptcy was attributed to unauthorized transfers of assets and the transmission of proprietary information to Fortress NFT Group.

In a surprising twist, digital asset custodian BitGo canceled its acquisition of Prime Trust on June 22. BitGo’s decision to cancel the deal came just a fortnight after it publicly disclosed its non-binding letter of intent to acquire Prime Trust.

After considerable effort and work to find a path forward with Prime Trust, BitGo has made the hard decision to terminate its acquisition of Prime Trust. This decision was not made lightly and BitGo remains committed to our mission to deliver trust in digital assets.

— BitGo (@BitGo) June 22, 2023

Prime Trust’s decision to file for Chapter 11 bankruptcy was preceded by the permanent appointment of John Guedry as Receiver for the Company. Additionally, a special restructuring committee, comprising John Guedry, John Wilcox, and Michael Wyse, has been established. This committee is empowered by Judge Susan Johnson of the Eighth Judicial District Court of the State of Nevada to oversee the company’s Chapter 11 Cases.

Under the guidance of the Special Committee, Prime Trust continues to operate as “debtors-in-possession” within the framework of the Bankruptcy Court’s jurisdiction. This approach ensures that the company’s affairs are managed in accordance with the relevant provisions of the Bankruptcy Code and the directives issued by the Bankruptcy Court.

As part of its restructuring strategy, Prime Trust intends to submit several motions to the Bankruptcy Court. These motions are designed to facilitate a systematic evaluation of various strategic alternatives. Among the options being considered is the potential sale of the company’s assets and operations while maintaining its status as a going concern. The statement read: