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From Cold Storage to Cold Reality: The Dramatic Decline of Prime Trust

In an unforeseen turn of events, Prime Trust, a prominent custodian for cryptocurrencies, recently filed for bankruptcy protection. According to the company’s interim CEO, Jor Law, excessive spending, losses on the unstablecoin terrausd, and complications with accessing customer funds in cold storage wallets were all significant contributing factors. As the company now faces insolvency, it is grappling with the consequences of its past management decisions and seeking ways to protect its assets and investigate the missing wallet. It remains unclear what the future holds for Prime Trust, as it considers options such as securing new financing, undergoing a sale, or seeking recapitalization through the court process.

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In this article, we will delve into the dramatic decline of Prime Trust, a crypto custodian company that recently filed for bankruptcy protection. We will explore the background of Prime Trust’s downfall, including lavish spending, losses on the stablecoin terrausd, and problems accessing customer funds held in cold storage wallets. We will then discuss the events surrounding the “Wallet Event,” which further exacerbated Prime Trust’s troubles. Following that, we will delve into the violations and business restrictions faced by the company, including the violation of Nevada’s trust company regulations, license revocations in other states, and the issuance of a cease-and-desist order. Next, we will examine the impact of Prime Trust’s Chapter 11 filing, including the protection of assets, maintenance of state licenses, addressing the company’s financial condition, and the investigation of the irretrievable wallet. Finally, we will discuss potential options for Prime Trust’s future, including new financing, a sale, or recapitalization.

Background of Prime Trust’s Decline

Prime Trust faced numerous challenges that ultimately led to its decline. One of the main factors was lavish spending coupled with depressed revenues during the crypto winter of 2022. Despite generating only $3.1 million in revenue, the company incurred expenses of $10.5 million in October 2022. Additionally, Prime Trust suffered losses of $6 million in customer funds and $2 million of its own corporate treasury money due to investments in the failed stablecoin terrausd.

Losses on the Stablecoin Terrausd

One of the significant contributors to Prime Trust’s decline was its investment in the stablecoin terrausd, which ultimately resulted in substantial losses. The terrausd stablecoin collapsed, causing Prime Trust to lose $2 million of its own corporate treasury money. This failure further strained the company’s financial health and undermined investor confidence.

Problems Accessing Customer Funds in Cold Storage Wallets

Prime Trust encountered difficulties accessing customer funds stored in its cold storage wallets, leading to severe consequences. The company had set up a cold storage wallet in 2018, secured by cryptographic keys held on Trezor and Ledger hardware devices. However, Prime Trust faced a communication breakdown during the migration of customer funds. This led to customers unwittingly depositing cryptocurrency into the old cold storage wallet. When customers later sought withdrawals, the company discovered that the wallet was inaccessible without the physical keys. Prime Trust was forced to use $76 million in customer funds to purchase replacement crypto for withdrawals from December 2021 to March 2022. The whereabouts of the original Cryptosteel devices that held the seed phrases needed to access the wallet remain unknown.

The Wallet Event

The “Wallet Event” marked a significant turning point in Prime Trust’s decline. This event refers to Prime Trust’s setup of a cold storage wallet secured by cryptographic keys in 2018. The company migrated customer funds to a new digital asset platform but faced a communication breakdown, resulting in some customers continuing to deposit cryptocurrency into the old cold storage wallet unknowingly. This situation was only discovered when customers sought withdrawals and Prime Trust realized the wallet was inaccessible without the physical keys.

Using Customer Funds to Purchase Replacement Crypto

To address the issue of inaccessible customer funds, Prime Trust resorted to using $76 million in customer funds to purchase replacement cryptocurrency for withdrawals. This solution provided customers with access to their funds, but it further strained Prime Trust’s financial position and raised concerns about the company’s handling of customer assets. The use of customer funds for this purpose was not only a breach of trust but also contributed to Prime Trust’s violation of regulations.

Violation of Nevada’s Trust Company Regulations

Prime Trust’s failure to secure customer funds and its use of customer funds to purchase replacement crypto put the company in violation of Nevada’s trust company regulations. This violation triggered a series of license revocations in other states, curtailing Prime Trust’s ability to conduct its business. As a consequence, the Nevada Financial Institutions Division issued a cease-and-desist order in June 2022, prohibiting Prime Trust from accepting new customer accounts. These regulatory actions further hindered the company’s ability to restore its financial health.

License Revocations in Other States

Prime Trust’s violation of Nevada’s trust company regulations resulted in license revocations in other states where the company operated. As regulators became aware of Prime Trust’s improper handling of customer funds, they took action to protect investors and prevent further harm. These license revocations severely restricted Prime Trust’s operations and exacerbated its financial troubles.

Cease-and-Desist Order

In June 2022, the Nevada Financial Institutions Division issued a cease-and-desist order against Prime Trust. This order prohibited the company from accepting new customer accounts, further impeding its ability to generate revenue and recover from its financial decline. The cease-and-desist order represented a significant blow to Prime Trust and served as a clear indication of the severity of the company’s violations and the regulatory concerns surrounding its operations.

Declining Business and Inability to Raise Capital

Prime Trust’s decline was also exacerbated by declining business and its inability to raise capital. As news of the company’s regulatory violations and financial troubles spread, investor confidence deteriorated, causing clients to seek alternatives. Prime Trust’s reputation suffered, leading to a significant reduction in new business. This decline in revenue, coupled with the mounting costs associated with addressing the wallet issue and regulatory violations, made it increasingly challenging for Prime Trust to raise the capital necessary to sustain its operations.

Receivership and Bankruptcy Filing

Due to its financial decline and regulatory troubles, Prime Trust entered receivership in July 2022. The Nevada court placed the company into receivership at the petition of state regulators, designating a special restructuring committee to oversee its affairs. This committee eventually decided to file for bankruptcy protection under Chapter 11. The Chapter 11 filing allows Prime Trust to protect its assets, maintain its state licenses, address its financial condition, and investigate the irretrievable wallet. It also opens up potential options for the company’s future, including seeking new financing, pursuing a sale, or engaging in recapitalization through the court process.

Impact of Chapter 11 Filing

The Chapter 11 filing has significant implications for Prime Trust and its stakeholders. First and foremost, it provides the company with protection for its assets during the bankruptcy proceedings. This safeguards the remaining value of Prime Trust’s business and allows for a more orderly resolution of its affairs. Additionally, the Chapter 11 filing enables Prime Trust to maintain its state licenses, ensuring that it can continue to operate legally within regulatory frameworks. Furthermore, the bankruptcy process allows for a thorough examination of Prime Trust’s financial condition, which can help determine the best course of action for resolving its outstanding issues and restoring stability.

Investigation of the Irretrievable Wallet

One of the critical objectives of the Chapter 11 filing is to investigate the irretrievable wallet and shed light on the circumstances surrounding its inaccessibility. Prime Trust’s inability to retrieve the physical keys required to access the wallet has raised concerns and questions regarding the security and management of customer funds. Through the bankruptcy process, a comprehensive investigation can be conducted to uncover the reasons behind the wallet’s inaccessibility, determine whether any misconduct or negligence occurred, and identify potential avenues for resolution.

Potential Options: New Financing, Sale, or Recapitalization

With the Chapter 11 filing in place, Prime Trust has several potential options for its future. One possible avenue is to seek new financing, which could provide the company with the necessary capital to address its outstanding issues and regain stability. Another option is to pursue a sale of the company, whereby a buyer could acquire Prime Trust’s assets and potentially leverage its technology and infrastructure. Finally, recapitalization through the court process offers yet another option, potentially involving the restructuring of the company’s debts and equity to reposition it for future success. The bankruptcy proceedings will allow for a careful evaluation of each option and a determination of the path that best serves Prime Trust’s interests and those of its stakeholders.

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Conclusion and Future Outlook

Prime Trust’s fall from grace serves as a cautionary tale for the crypto industry. The company’s decline was marked by excessive spending, losses on the stablecoin terrausd, and problems accessing customer funds held in cold storage wallets. These factors, coupled with regulatory violations, license revocations, and a decline in business, ultimately led to the company’s filing for bankruptcy protection. The Chapter 11 filing opens doors for Prime Trust to protect its assets, address its financial condition, and explore potential options for the future. The investigation into the irretrievable wallet will shed light on the events surrounding its inaccessibility, providing valuable insights into the company’s operations and management. The path forward for Prime Trust will be determined through the bankruptcy proceedings, allowing for a careful consideration of new financing, a potential sale, or recapitalization to pave the way for its future success.

Opinions and Comments

What are your thoughts on Prime Trust’s decline and subsequent bankruptcy filing? Do you believe the company’s management was adequately responsible for its financial troubles? Share your opinions and comments below.

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