As an amicus participant in Prime Trust’s bankruptcy case, Coinbase strives to protect customer funds and prevent customer assets held at Prime Trust from being subject to bankruptcy proceedings.
Coinbase Seeks to Protect Customer Assets
On August 14, 2023, Prime Trust filed for Chapter 11 bankruptcy protection in Delaware as a digital asset custodian. Prime Trust required the creation of a committee to direct the liquidation process of its company assets. After customer deposits plummeted, regulators determined an $82 million deficit, which led to the bankruptcy filing.
Many of Prime Trust’s assets were in illiquid tokens, worsening the financial crisis. On February 5, Coinbase submitted an amicus brief to support the protection of customer assets in the bankruptcy case. Paul Grewal, Coinbase’s chief legal officer, emphasized that assets held by custodians should not be absorbed into bankruptcy proceedings.
He cited Article 8 of the Uniform Commercial Code (UCC), which legally ensures that customer assets remain separate from a custodian’s financial liabilities. Grewal pointed out that Coinbase and Prime Trust have terms of service that explicitly state that the custodian does not own customer assets.
Prime Trust’s Financial Struggles and Bankruptcy
The crypto industry benefited from Prime Trust because it delivered safe storage solutions to institutional investors. The organization declined through underperforming its asset management capabilities. The company listed $500 million worth of liabilities causing concerns about its ability to meet customer obligations. The bankruptcy announcement happened shortly after the FTX collapse in November 2022 while Sam
Bankman-Fried received a 25-year prison sentence following his conviction for fraud during 2024.
Companies face comparable problems during their operations. Celsius Network filed bankruptcy in July 2022 through bankruptcy court when the company showed a $1.2 billion shortfall and creditor debts surpassing $4.7 billion. The reported cases demonstrate both the dangers from crypto custodians and the critical need to protect user deposited funds.
Coinbase Pushes for Industry-Wide Asset Protection
Through participation in the Prime Trust case, Coinbase is working to define improved security measures for cryptocurrency customer assets. The company supports Article 8 of the UCC, which protects all custodian businesses by preventing customer funds from being affected during financial crises.
According to Grewal, the matter extends further than cryptocurrency. The legal system applies identical regulations to standard financial institutions and digital platforms, so precise rules are required to prevent bankruptcy from touching customer property. Coinbase’s participation represents a larger initiative to create legal safeguards that defend cryptocurrency investors and normal financial market investors.