Nevada’s financial regulator filed a petition on Tuesday to place Prime Trust into receivership. In the filing, the regulator said Prime Trust has a $861,000 shortfall of its crypto obligations but it only has $2,904,000 of fiat reserves with $85,670,000 of outstanding fiat obligations!!! It appears that the seed of the shortfall was long planted when Prime Trust lost the private key of a wallet they own that has $45M worth of crypto in it, including 23,777 of ETH. They started using customer funds to trade cryptos and cover withdrawal requests after losing the key. In other words, they have been insolvent for a long time due to mismanagement of private keys.
I have been trying to find out who are the customers of Prime Trust but couldn’t find any valid information on the internet. I only know they serve business customers, i.e. fintech companies and other exchanges. But I couldn’t find who exactly Prime Trust’s customers were. One thing we are sure of is that customers with funds on Prime Trust are set to lose $80M+ of money. When they first started, I suppose Prime Trust didn’t intend to steal customer funds. But when they lost the private key to the $45M wallet, they went down the path to misuse customer funds. This is the main problem with centralized exchanges/custodians. The custody of the funds is not fully transparent and they are incentivized to misuse customer funds when they are in a difficult situation. Imagine you were the Prime Trust CEO when the private key was lost, would you have announced to all your customers that a large portion of the funds was lost and triggered a *bank run* or would you silently deal with the shortfall and try to shore up the balance sheet? I believe most people would pick the latter but in that case, customers are silently screwed. I wouldn’t be surprised if a significant percentage of centralized exchanges are ticking time bombs like Prime Trust. I am shocked that millions of people still have their cryptos on the centralized exchanges though.