The recent bankruptcy of Prime Trust has highlighted the inherent risks associated with self-custody in the digital asset industry, according to the CEO of Anchorage Digital. This is expected to have significant implications for the adoption of self-custody solutions and could lead to increased reliance on third-party custodians. Stay informed about the latest developments in digital asset custody to protect your investments.
Title 1: The Risks and Failures of Crypto Custody: Lessons from Prime Trust Incident
Title 2: Addressing the Widespread Risks in the Crypto Custody Industry
The failure of cryptocurrency custodian Prime Trust during the summer of 2023 highlighted the inherent risks associated with self-custody in the digital asset industry. However, according to Diogo Monica, the CEO of Anchorage Digital, these risks are not limited to Prime Trust alone, but rather they are widespread throughout the industry. In a recent interview with Decrypt, Monica discussed the problems faced by Prime Trust, emphasizing that the issue was not with their technology but rather their inability to use it properly.
Describing the failure as an “integration failure,” Monica explained that Prime Trust lacked the technical expertise required to fulfill their custody responsibilities effectively. As a company entirely focused on custody services, this proved to be fatal to Prime Trust. The incident, termed the “Wallet Incident” in a filing submitted to the U.S. Bankruptcy Court, detailed how Prime Trust found itself locked out of its own “cold storage” wallets, resulting in the loss of access to millions of deposited assets.
One of the key contributing factors to the incident was Prime Trust’s continued use of old wallets despite purchasing a new solution from the digital asset security platform, Fireblocks. This negligence led to irrecoverable assets and eventually resulted in Prime Trust losing $6 million in client funds and an additional $2 million from its own treasury through investments in TerraLUNA, which collapsed in May 2022.
According to Monica, Prime Trust’s custody problems cannot be separated from its misuse of client funds for high-risk investments. This case serves as a stark example of the wider problem in the industry related to custody. For years, there has been a lack of qualified custodians available, leaving self-custody as the predominant approach. Despite the emergence of more custodians, the industry has yet to move significantly away from this path.
Regulators have begun to address this issue to some extent. The Securities and Exchange Commission proposed a new rule in February that requires investment advisers to segregate investor assets and partner with qualified custodians, including for digital assets. Monica believes that existing custodian rules from traditional finance can be effective in protecting digital assets if applied correctly.
To foster a safer custody environment, Monica suggests that future rules should focus on setting clear definitions for digital assets. This clarity would invite more custodians to enter the market, drawing on the expertise of hundreds of broker dealers and banks experienced in handling such assets.
In conclusion, the failure of Prime Trust highlights the risks associated with self-custody and the urgent need for more qualified custodians in the crypto industry. Moving forward, regulatory efforts should prioritize defining digital assets, enabling the industry to benefit from the established practices and standards of traditional finance. By addressing these challenges, the industry can enhance the security and reliability of digital asset custody services.