The Breakdown - A Crypto Custodian Becomes the Latest Casualty

Episode Date: June 9, 2023

BitGo has agreed to buy Prime Trust as the crypto custodian becomes the latest casualty of the bear market (and the government's assault on the industry). Binance is also pulling fiat rails from the US in advance of their hearing next Tuesday. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? Welcome back to The Breakdown. It is Friday, June 9th. And today we are talking about BitGo buying Prime Trust. Before we get into that, if you're enjoying the breakdown, please subscribe to it. Give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly. slash breakdown pod.

Well, friends, as you can hear, I am losing my voice, which is a very, very bad thing for a podcaster. It was actually worse than this last night, so I'm hoping to make it through a few shows. Unfortunately, I record a lot on Fridays. So you may have your very first AI Red LRS in just a little bit. But today for our Friday show, we are giving the latest in the Binance saga first. Binance U.S. is closing down its fiat rails and operating as an all-crypto exchange as of Tuesday. The exchange says the measure is temporary and being taken in an effort to, quote, protect our customers and platform as its court date approaches. Yesterday, Binance U.S. tweeted,

the SEC has taken to using extremely aggressive and intimidating tactics in its pursuit of an ideological campaign against the American digital asset industry. Binance U.S. and our business partners have not been spared in the use of these tactics, which has created challenges for the banks with whom we work. As a result, in an effort to protect our customers and platform, today we are suspending USD deposits and notifying customers that our banking partners are preparing to pause via USD withdrawal channels as early as June 13, 2023. We encourage customers to take appropriate action with their USD. Now, on Tuesday, Binance US is due in federal court to fight against an SEC injunction which could freeze user funds on the platform. At this time, US dollar deposits have already been

closed, and any US dollars remaining on the platform after Tuesday can be converted into stable coins and withdrawn from the exchange on chain. The exchange claims that customer assets continue to be reserved on a one-to-one basis and that crypto deposits and withdrawals will remain available. Now, the genesis of this is that according to SEC filings, Binance International had transferred as much as $12 billion offshore from Binance U.S. to firms owned by CZ, with a private audit stating that this movement of funds

made it unclear whether the U.S. exchange was adequately reserved. On Thursday, CZ hit back at these claims, stating in a tweet, this is simply false, not sure if it's the journalist or the, the source. To the best of my knowledge, Binance U.S. had in total roughly $2 billion in user funds. This number in U.S. equivalent fluctuates as little as crypto prices change, and declining as users withdraw due to recent news. All user funds are accounted for and never left the Binance U.S. platform unless users withdraw them themselves, of course. Now, there are some pretty serious skepticism in the community. Ikega founder Travis Kling wrote,

The reply guys here are cute. I wish all of you the very best and sincerely hope no one loses a single dollar on Binance. If you actually read the complaints from the CFTC and the SEC and the mountain of evidence contained therein and arrive at the conclusion that CZ is trustworthy and your funds are safe, I don't know what to tell you. We have nothing to talk about. Adam Cochran, for his part, thought the positioning was weird. He said, I'm not sure I understand the spin here. How would this protect users? What does it have to do with the SEC case, which still applies to the assets, and nothing to do with if there is cash or not on the exchange? Also, which banking partners did they have left? All the SEC document listed ones are either gone or were partnered with Merit Peak

and not Binance directly, other than maybe one small regional? Now, Andrew Bailey pointed out a strange upside, saying, it's an interesting piece of evidence that Binance.us is solvent, at least when it comes to their dollar liabilities, actively encouraging users to make USD withdrawals via ACH, and Eleanor Territ from Fox gives what is potentially an explanation for what's going on. She tweets, from an industry source close to Binance US, quote, I can't stress this enough. The SEC is actively intimidating the banking partners, and that's why this is happening. Now, functionally speaking, what should be noted here is whoever's right, whoever's wrong. The SEC has at this point achieved the effect of a more serious injunction than even they were

asking for without setting foot in court. Just as a function of the pressure on banks and customers around this, they are effectively causing people to withdraw their funds and crater Binance U.S. market. Now, another piece of the broader crypto puzzle has been a rumor of a custodian going bankrupt that has been swirling for the last couple weeks. On June 7th, David Bailey wrote, Major Custodian about to declare bankruptcy without last-minute bailout. Take your Bitcoin off exchanges, even Bitcoin-only platforms. Pleditor says, I've not seen any evidence to support this rumor. However, it is interesting looking at how many clients Prime Trust has lost recently.

And indeed, Prime Trust has been rumored to be on the ropes for some time. The firm had provided custodial services and access to banking partnerships for many crypto firms, including Cracken, strike, Bitrex, and Ave. But because of that, they've been dragged into many of the crypto lawsuits and scandals over the past year. They provided services to FTX and more recently referred to as a service provider for Binance U.S. in this week's SEC lawsuit. Recently, Prime Trust has begun hemorrhaging customers with only a small handful now remaining. Swan Bitcoin was one of the recent companies to shift custody providers migrating customer funds last week to BitGo and Fortress trust. Now, that migration had been rocky with withdrawals halted briefly this week and issues with

software migration which had integrated Prime Trust APIs. Cracken and Strike also have migrated custodial services in-house recently. Now, keep in mind that Prime Trust raised $100 million in funding just last June one year ago, which shows just how fast things have changed in this space. But the big news is that CryptoCustody firm Bitco has now signed a letter of intent to acquire their rival Prime Trust. The non-binding term sheet would see Bitco purchase 100% of the equity in prime trust, but will require regulatory approval before completion. Prime Trust's interim CEO, Jor Law, said in a statement, combination of prime trust and BitGo would be a significant enhancement for the industry.

No other company will have the breadth of product and services nor depth of experience that this combined company would have. We're excited to offer our world-class infrastructure within a broader ecosystem and revolutionize the future of crypto. Mike Belchie, the CEO and co-founder of BitGo, said, this is a landmark transaction, leading a greater shift in the digital asset landscape toward a more secure and sustainable future. With the expected acquisition of Prime Trust, BitGo is well positioned to enhance its best-in-class trusted solutions and to service the combined customer base. Now, people have been basically scratching their heads. Asher Hop writes, Does anyone have the inside scoop on how Prime Trust destroyed their business? It seems like they had a virtual monopoly on a valuable niche with many paying customers,

and in just a short time they were forced into an asset sale? What happened? Jesse Myers writes, whoa, big news, prime trust absorbed. Stability instead of bankruptcy? And Cryptodamus said, I guess the obvious question is, is this actually a purchase or is it really a bailout to save the rest of the industry? Well, for now, the deal is merely on the table at this stage, so we will just have to wait and see. Meanwhile, in jerk news, SEC chair, Gary Gensler continued his public speaking tour on Thursday with an appearance at the Piper Sandler Global Exchange and FinTech Conference. He contended that his agency had given ample warning that this week's crackdown was coming. He said, when crypto asset market participants go on Twitter or TV and say they lacked fair notice that their conduct could be illegal, don't believe it. They may have had a calculated economic

decision to take the risk of enforcement as the cost of doing business. Gensler also rejected the view that registration was impossible for crypto firms. In fact, in a fairly pointed swipe at Coinbase's rhetoric that they had engaged in numerous meetings with the regulator in an attempt to come into compliance, Gensler said that registration takes more than just, quote, seeking a bunch of meetings with the SEC during which you're unwilling to make the changes needed to comply with the securities laws. And at core, Gensler's main point just continues to be his belief that basically all tokens are unregistered securities. He said some promoters of crypto asset securities contend that their token has a function beyond simply being an investment vehicle. Some additional utility does not remove a crypto asset security from the definition of an investment contract.

The investing public generally buys these crypto assets at least in part anticipating profit based on the efforts of those token issuers. Now, zooming out from the U.S., chokepoint 2.0 continues to take hold in Australia as well. Commonwealth Bank, the largest bank in Australia, will limit payments to crypto exchanges citing concerns about rising fraud. The bank will limit customers to depositing 10,000 Australian dollars around 6,700 U.S. per month in crypto exchanges, and it will also decline certain payments to exchanges or place them on a 24-hour hold. James Roberts, Commonwealth's general manager of fraud management, said, quote,

With the incidence of scams increasing and in many cases customers suffering significant losses from being scammed, the introduction of 24-hour holds, declines, and limits on outbound payments to crypto exchanges will help reduce both the number of scams and the amount of money lost by customers. End quote. Now you'll remember that last month, Westpac, another member of Australia's Big Four banks, banned transfers to Binance entirely along with certain other platforms. Not so long ago, Australia's banks were gearing up to enter the crypto industry, with Commonwealth Bank pledging to introduce in-app crypto purchases in late 20.

ultimately, however, the plans hit a regulatory snag and were delayed indefinitely, with financial services regulators unable to reach an agreement on appropriate product disclosure statements. Richard Galvin, co-founder of the Digi Asset Fund, says, Choke Point 2.0 continues to go global. Australia's biggest bank limiting exchange deposits to 10K per month with 24-hour holds. Crypto developer clouded mine writes, Australia is slowly debanking its crypto industry. The largest bank in Austin introduced 24-hour holds on all transactions to crypto exchanges. They're also going to introduce a 10K limit per month, extremely sad to see.

Australian crypto lawyer Jabbs writes, I appreciate Commonwealth Bank protecting me. I feel very safe. Like all CBA customers, I'm very irresponsible and happy to wait 24 hours before buying any crypto. After all, the money in my CBA account is not my money and CBA can do what it wants with it. Still, maybe the best comment came from Carol Bauer, the CEO of BTC Markets, who said, it's important to keep in mind that despite the significance of the SEC, they do not regulate

crypto in Australia. All right, guys, I am going to wrap it there. I apologize for the shorter than normal episode. I think it's pretty clear why. I'm going to try to make it through a weekly recap in the LRS as well, but in any case, I hope to be back with you very soon, with my voice fully intact. But until then, be safe and take care of each other. Peace.