The state of Nevada has filed a petition with a federal court requesting the appointment of a receivership for Prime Trust. The financial custody platform is accused of using customer funds to purchase cryptocurrencies.
The receivership petition alleges that Prime Trust lost access to digital wallets containing assets worth millions.
Petition Seeks Court Injunction Against Prime Trust
The comprehensive 30-page receivership petition submitted on Monday asks for the immediate impounding of assets belonging to Prime Trust. Furthermore, it seeks a court injunction against the company, its officers, and its agents. It will prohibit them from accessing any of the company’s funds.
The Nevada Financial Institutions Division had previously issued an order instructing Prime Trust to cease all fiat currency deposits and digital assets within the state’s jurisdiction.
The move by Nevada underscores the seriousness of the allegations against the platform and the potential impact on its customers. The accusations primarily raise concerns about businesses’ handling of customer funds.
Recently, a New Zealand-based travel company reportedly used customer funds intended for prepaid trips to engage in active cryptocurrency trading.
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The issue of what companies and exchanges do with customer funds has become a prominent topic of discussion, especially in the aftermath of the FTX collapse.
Prime Trust’s loss of access to digital wallets containing significant assets has further fueled suspicions of mismanagement and negligence on the part of the custodian, which handled money from mammoth exchanges like FTX, Binance.US, and Celsius Network.
Celsius had come after Prime Trust in legal action, but the latter agreed to return $17 million.
Handling of Customer Funds and Mismanagement
According to the petition, Prime Trust encountered difficulties accessing some cryptocurrency wallets in December 2021. As a result, from December 2021 to March 2022, the company resorted to using customer funds from its omnibus customer accounts to purchase additional digital currency to fulfill withdrawal requests.
The petition states,
“it is understood that PRIME’s financial status is such that it owes, in fiat currency, $85,670,000 to its clients but has $2,904,000 in fiat currency (equaling an $82,766,000 fiat currency liability).”
According to the petition, the company would be incapable of fulfilling all of its withdrawal requests due shortfall of available funds.
Therefore, the court’s decision to appoint a receiver will be crucial to assume control of the platform’s operations. It will determine whether the company will be liquidated or restructured.
Previously, Prime Trust was met with a cease-and-desist from several states. In June, Stably made an announcement stating that the company had temporarily suspended all deposits and withdrawal requests.
Last week, BitGo revealed that it had terminated its acquisition of Prime Trust after extensive deliberation. This came days after Prime Trust subsidiary Banq filed for bankruptcy.
That said, the outcome of this legal action will likely have implications for the broader custodian industry. It calls for measures to ensure the secure management of customer funds.
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