Also, Consensus Magazine has published a data-driven ranking of the 15 best cities to live and work for crypto professionals. Check out our Crypto Hubs 2023 list here, and read about the project’s methodology here.
Legal Happenings
Crypto exchange Coinbase has filed its first legal response to the U.S. Securities and Exchange Commission’s (SEC) lawsuit, arguing among other things that digital assets on its trading platform are not securities. The SEC sued Coinbase at the beginning of June for listing a dozen problematic assets. Separately, former customers of crypto exchange FTX, trading firm Alameda Research and dozens of affiliated companies now have until Sept. 29 to submit a claim with the bankruptcy estate and vote on the Chapter 11 restructuring plan. The list of debtor companies eligible for the claims can be found here. This comes after FTX filed suit against former FTX compliance officer Daniel Friedberg for allegedly paying “hush money” bribes to insiders who witnessed alleged criminal activities. Friedberg faces 11 charges, including legal malpractice, breach of fiduciary duty and several counts of fraudulent transfers.
European Rules
Binance’s banking partner in Europe, Paysafe Payment Solutions, is cutting ties with the exchange amid a flurry of setbacks for crypto giant. According to a notice Binance sent alerting users they may be required to update their banking information, euro-based services could be disrupted beginning Sept. 25. Meanwhile, Germany is the latest European country to deny Binance a critical license to operate following similar moves in Belgium, Cyprus and the Netherlands. Elsewhere, Worldcoin, the blockchain identity project co-founded by OpenAI CEO Sam Altman, has integrated with security giant Okta to offer a “Sign in with Worldcoin” that will enable developers to sign into apps alongside Google or Facebook. Further, Worldcoin announced it is bringing its World ID identity protocol to Germany, a country known for stringent data-protection rules.
A message from PayPal
Your money is your money. You own it. You make the decision. PayPal believes that you should have the same freedom to use and manage your crypto. If that means adding to your NFT collection or HODLing, have some peace of mind knowing that PayPal has your back. Buy, sell, hodl, transfer, send and checkout. Make your crypto move, today.
A U.K. bill giving regulators the power to supervise crypto and stablecoins is now officially law, following the purely procedural step of King Charles granting “royal assent.” The bill, known as the Financial Services and Markets Bill an Act, was approved last week by the upper chamber of Parliament granting the U.K. Treasury, Financial Conduct Authority, Bank of England and other regulators the ability to introduce and enforce rules to regulate the sector. This comes as Mastercard sets up its Multi-Token Network (MTN), a testbed for exploring tokenized bank deposits that will be available in beta mode this summer in the U.K.
This escalated quickly for what seems to be a good reason. Prime Trust allegedly owes its clients $85 million in fiat, and has about $3 million in fiat currency on hand. The company also owes a further $69.5 million in crypto, and has $68.6 million in crypto on hand. It’s not really the number mismatch that has caught eyes, but rather the way Prime Trust came to experience this shortfall.
According to the filing, Prime Trust is unable to access “legacy wallets.” Before 2020, Prime Trust managed its customer’s crypto in its own wallets. In 2020, Prime Trust migrated customer assets to Fireblocks, an institutional custody and security firm, to have Fireblocks manage crypto assets on behalf of Prime Trust’s customers. Then, in 2021, after Prime Trust had turnover in its management team, it set up “legacy wallet forwarding,” and had funds sent back to Prime Trust’s old pre-2020 wallets. This, it turned out, was a huge mistake.
In December 2021, Prime Trust discovered that it was unable to access its legacy wallets. Here’s the bombshell from the filing: “It is understood that from December 2021 to March 2022, to satisfy the withdrawals from the inaccessible Legacy Wallets, Prime Trust purchased additional digital currency using customer money from “omnibus customer accounts.”
There are two major takeaways here.
First, a custodian like Prime Trust not having access to wallets is incomprehensible; the whole point of a custody service is to pay someone to be better at it than you are. This incident completely undermines the marketing pitch and business case used by third-party custodians – the claim that people aren’t smart or brave enough to hold their own crypto, so they should trust a custodian. They’re the experts after all. Apparently, that wasn’t the case with Prime Trust, which seemed to be a legitimate company. Last year, Prime Trust raised over $100 million in a funding round that included FIS, Fin Capital, Mercato Partners, Kraken Ventures and William Blair.
Second (and main) issue: Seriously, how difficult is it to custody crypto for others? It should be straightforward. You give me crypto, I hold crypto for you, I give it back to you when you want it, and you pay me for those services. This is something individuals are wholly capable of achieving on their own in the world self-custody. This should be a cakewalk for sophisticated companies that garner nine figures worth of venture funding.
The Prime Trust story is developing, so I’ll refrain from casting final judgment until we know the full story, but there are a few things that need to be fleshed out. How exactly did this happen and what exactly was the “additional digital currency” Prime Trust purchased allegedly using customer money? Was Prime Trust trading crypto in hopes it would make up the difference and pay back customers without a hitch?
If this is the case, then we enter an entirely new world for this story. The counterparty risk associated with custodians is that they might lose your crypto, there shouldn’t be an additional risk associated with the custodian trying to make it back in one trade after they lost your crypto.
Big picture, this is bad news, and not just for Prime Trust customers. If we’re being honest, the situation sends the message that this kind of basic failure is the norm in crypto, not the exception. As bad as the financial losses are, the larger problem is the apparent coverup by Prime Trust seemingly exposed during its failed acquisition negotiations. (By the way, who on the other side of that table did they think they were going to fool? And how?)
Crypto has a shady mainstream reputation and here’s yet another example of shady behavior. Given Prime Trust’s pedigree, it immediately makes you wonder who else – maybe even with a trusted name – is playing fast and loose with user deposits. Maybe they are. Hopefully they aren’t. But during crypto bull markets where no-name tokens can increase by a factor of 100 or 1,000, maybe they have and gotten away with it. Here’s to hoping that’s not true.
If we’ve learned one thing about the crypto space in the past year, it’s this: Trust matters.
One way to earn trust is to get vetted by a reputable financial institution. Which is why it’s notable that Alchemy Pay, a gateway between fiat and crypto, has been given the stamp of approval, of sorts, by a trusted brand in finance: Mastercard. Continue reading
