Insights Into Crypto Bankruptcy

Caitlin Long is someone I’ve been tracking for a while now. Trust me when I tell you, she knows her stuff when it comes to crypto. Recently, she’s dissected the demise of Prime Trust, a state-chartered trust company that’s now stumbling through a voluntary Chapter 11. According to Caitlin, your typical banks offer their clients a much better safety net in these regrettable scenarios than these state-chartered firms, and this will be a necessity for institutional adoption.

Let’s think about it: the federal bankruptcy process is a bit like a fierce game of poker. It’s all about getting the biggest slice of the pie. The problem is, it’s the pie that’s the star of the show, not the customer. Now contrast that to the banks. They treat their receivership like a top-tier Premier League match, always keeping their eyes on the ball – that is, protecting the customer.

And that’s why Caitlin is shaking things up over in Wyoming, where her Custodia Bank is setting up a specific depository institution focused on crypto clients, an essential move to sidestep the federal bankruptcy.

In federal bankruptcy it’s constant litigation, customers of Prime Trust could find themselves tied up with ‘preferences’ and ‘clawbacks’ like some sort of regulatory tug-of-war. Caitlin points to the ambiguous terms in Prime Trust’s customer agreement, which could turn Chapter 11 into a Gordian Knot. They hold the title to customers’ digital assets, a term that muddies the waters when determining the rightful owners.

Even if these customers are crowned the owners in Chapter 11, Caitlin warns that they could still get a rough deal. She refers to the Celsius case where customers had to bite the bullet and take a 27.5% hit on their assets to get their cash back quickly.

Caitlin argues that Prime Trust’s forays into the risky world of unusual protocols and yield farming may have been setting their customers up for a fall.

Being the custodian of the customer, Caitlin is pushing for beefed-up legal protections in the industry. She’s urging customers to kick the tires and check the credit risk of their counterparts. She’s clear: the difference between a bank and a non-bank custodian is as stark as night and day.

And finally, she’s raising a red flag over Bitcoin and Ethereum ETFs with non-bank custodians, saying that they could get sucked into the black hole of federal bankruptcy.

All this might seem too granular, or just a small detail, but I believe it can make all the difference in the world, when running a business in crypto. Clients exposed to the Celsius and Prime Trust debacles will certainly value it, and I believe that clarity and visibility on this issue will be good for the industry.

More By This Author:

The Great Reset: Dancing On The Edge Of A Debt Vortex
Contradictions And Paradoxes: Decoding The Federal Reserve’s Soft Landing Narrative
BoJ Yield Curve Policy Pivot And The Echo Across Global Markets

Disclaimer:  This text expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the ...

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.