Prime Trust’s Collapse Highlights Risks of Self-Custody in Crypto
The recent collapse of crypto custodian Prime Trust has shed light on the inherent risks of self-custody within the cryptocurrency industry, according to Diogo Monica, CEO of Anchorage Digital. In an interview with Decrypt, Monica emphasized that Prime Trust’s failure was not due to the technology they used, but rather their inability to effectively utilize it. He described it as an “integration failure” and highlighted the company’s lack of technical expertise in asset custody. The critical issue, known as the “Wallet Incident,” involved Prime Trust continuing to store tokens in an old wallet despite acquiring a new solution. This resulted in millions of dollars in assets becoming inaccessible. Prime Trust also mishandled client funds through risky investments, compounding its problems.
Traditional Finance Custody Rules Could Apply to Crypto
Monica believes that Prime Trust’s case reveals a broader problem in the crypto custody industry. He noted that there has been a shortage of qualified custodians for years, leading many to choose self-custody. While regulators are beginning to address this shortage, Monica suggested that existing custodian rules from traditional finance could serve as a framework for protecting client funds in the cryptocurrency space.
Call for Regulatory Clarity
Anchorage Digital, the first federally chartered crypto bank in the US, has called for clear definitions of digital assets by Congress to facilitate the entry of more custodians into the crypto space and better protect investors. Monica stated that if digital assets were clearly classified as securities, there would be numerous broker dealers and banks working with companies in compliance. Regulatory uncertainty in the US has been a key factor in Anchorage Digital’s decision to lay off employees earlier this year.
Surge in Business Expected in 2023
Anchorage Digital has experienced a surge in business this year, driven by institutions seeking safer storage solutions for their crypto. Monica stated that the firm has seen inflows in the billions of dollars, with institutions showing a growing interest in the crypto sector. The shift from retail domination to institutional accumulation is becoming more prominent.
Hot Take: Strengthening Crypto Custody Through Regulatory Frameworks
The collapse of Prime Trust highlights the need for stronger regulatory frameworks in the crypto custody industry. Self-custody carries inherent risks, as demonstrated by Prime Trust’s integration failure and mishandling of client funds. By adopting existing custodian rules from traditional finance, the crypto industry can better protect client assets and provide a solid framework for qualified custodians. Regulatory clarity is crucial in facilitating the entry of more custodians into the crypto space and ensuring investor protection. Anchorage Digital’s surge in business showcases the increasing demand for secure crypto storage solutions from institutional investors. As the industry continues to evolve, strengthening custodial practices and regulatory oversight is essential for its long-term growth and stability.
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