Bitcoin News Today: Delaware Judge Rules Prime Trust Assets Belong to Bankruptcy Estate Not Investors

The recent bankruptcy ruling in the Prime Trust case has sparked significant concern among digital asset investors and custodians, raising questions about the reliability of legal structures meant to protect assets in the cryptocurrency industry. In June 2023, Prime Trust—a regulated trust company widely used for digital asset custody—abruptly shut down, leaving thousands of investors unable to access their assets. Over time, investigations revealed that the firm had engaged in a prolonged fraud affecting over $80 million in assets. Despite the fact that not all assets were compromised, the entire estate was subjected to bankruptcy proceedings, halting access for all account holders until resolution [1].

The core issue in the bankruptcy case revolved around determining what property belonged to the company versus what belonged to its clients. In a decision released in May 2024, Judge J. Kate Stickles of the U.S. Bankruptcy Court for the District of Delaware ruled that all assets in Prime Trust’s possession at the time of its closure—approximately hundreds of millions of dollars—belonged to the estate, not the individual account holders [1]. This ruling effectively allowed attorneys for the estate to claim a significant portion of the assets to cover legal fees, leaving account holders with little to no recovery [1].

Critics argue that this outcome undermines the foundational principles of custody. Prime Trust had operated under the public perception and contractual assurances that client assets were legally and physically separate. However, the court found that the “comingling” of digital assets—both within and across blockchains—rendered it impossible to trace ownership with precision. This legal interpretation ignores the unique characteristics of blockchain technology, particularly the transparent and traceable nature of Bitcoin’s UTXO (unspent transaction output) model, which allows for precise tracking of asset ownership [1].

The ruling has drawn comparisons to other high-profile digital asset bankruptcies, such as those of Celsius and FTX, where custodians who were perceived as trustworthy custodians were ultimately treated as general creditors. These cases have highlighted a systemic issue in the bankruptcy system: the tendency for legal professionals to benefit disproportionately from the liquidation process, often at the expense of ordinary investors [1].

Legal scholars, including Lynn LoPucki, have long critiqued the competitive nature of bankruptcy venues, particularly in Delaware and New York. In her work Courting Failure, LoPucki outlines how the incentive structure of bankruptcy courts encourages rulings that favor legal professionals and powerful insiders, often resulting in excessive fees and minimal returns for victims of financial collapse. The outcome in the Prime Trust case aligns with this pattern, reinforcing concerns about how bankruptcy law applies to digital assets [1].

The Prime Trust case underscores a broader need for legal reform in the digital asset space. As the industry continues to grow, the judicial system must evolve to understand and adapt to the unique properties of blockchain technology. Investors must now reconsider the meaning of terms like “regulated custodian” and “fiduciary,” recognizing that legal protections are not always guaranteed in the event of insolvency [1].

The case also highlights the importance of self-custody and the limitations of relying on third-party custodians. While the Prime Trust closure was a tragic event, it serves as a cautionary tale for investors navigating an increasingly complex and high-stakes financial landscape [1].

Source: [1] Prime Trust Bankruptcy: What it Means for Bitcoin Custody and Investors (https://bitcoinmagazine.com/legal/prime-trust-bankruptcy-bitcoin-investors)