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- Prime Trust’s bankruptcy reveals systemic flaws in self-custody.
- CEO of Anchorage Digital, Diogo Monica, underscores the importance of proper custody standards.
- Current banking regulations, rather than new ones, can safeguard against such failures.
The Root Cause: Not Tech, but its Application
The collapse of crypto custodian Prime Trust wasn’t due to technological glitches, but rather its flawed application. In a revealing chat with Decrypt, Diogo Monica emphasized that Prime Trust’s downfall stemmed from their inability to harness their own technology, a grave error for a firm centered around custody. “An integration failure,” as Monica described, it painted a picture of a company lacking the technical prowess it claimed to possess.
Inside the “Wallet Incident”: A Cascade of Missteps
Last month, a filing in the U.S. Bankruptcy Court of Delaware by Prime Trust’s CEO Richard Lai unveiled a sequence of mistakes. The company inadvertently locked themselves out of their “cold storage” wallets, thereby losing access to vast sums in assets. Dubbed the “Wallet Incident,” Lai revealed that the firm persisted in using the said wallet even after procuring a newer solution from Fireblocks, a digital asset security platform. This oversight led to assets becoming irrevocably lost. Matters escalated when an unidentified client’s sizable Ethereum
The Larger Picture: Custody Issues are Systemic
According to Monica, it’s impossible to separate Prime Trust’s custody issues from its financial blunders. He believes that the firm’s mismanagement sheds light on a broader custody-related challenge in the crypto sector. The historical lack of skilled custodians prompted many to opt for self-custody. Monica laments that even with the emergence of newer custodians, the industry hasn’t veered far from its initial self-custody course. He reminisces, “Three years ago, the absence of mature crypto standards and players misguided many.”
Regulatory Responses and The Road Ahead
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Recognizing these challenges, the Securities and Exchange Commission (SEC) introduced a proposal in February. This new rule mandates investment advisers to separate investor assets and compels qualified custodians to provide the same assurance, encompassing digital assets. Monica, whose firm became the inaugural federally chartered crypto bank in the U.S. in 2021, vouches for traditional finance’s custodian
