Coinbase filed an amicus brief in the bankruptcy case of crypto custodian, Prime Trust. According to the exchange’s chief legal officer, Paul Grewal, he said the filing is a bid to protect customer assets being held by the custodian during its financial restructuring.
Coinbase chief legal officer Paul Grewal cites Article 8 of the Uniform Commercial Code (UCC), which ensures that assets held by custodians remain property of the customers even in bankruptcy cases.
Coinbase intervenes in Prime Trust bankruptcy
Prime Trust is a crypto custody service that helps institutional investors securely save their cryptocurrencies, amongst other services. On August 14, 2023, Prime Trust filed for Chapter 11 bankruptcy protection in Delaware, asking for the creation of a committee to liquidate its assets. The company cited a decline in customer deposits, with regulators identifying a $82 million deficit in customer deposits.
The bankruptcy situation was exacerbated because a significant portion of clients’ holding is in illiquid tokens.
As of February 5, Coinbase has now inserted itself in the Prime Trust bankruptcy proceedings after it filed an amicus brief, urging the court to uphold legal protections for customers’ assets held by custodians.
Paul Grewal, in an X post said that customer assets should not be absorbed into a custodian’s bankruptcy proceedings. He maintains that according to Article 8, custodian assets belong to clients not custodians, and that this is spelled out in both Coinbase and Prime Trust’s user agreement.
“UCC Article 8 is a pillar of commercial law that protects customer assets– held by custodians big and small, in digital or traditional finance (including BNY and DTC)– from unfairly getting swallowed up in bankruptcy,” Paul said.
Poor asset management is at the center of Prime Trust’s bankruptcy, with liabilities reaching up to $500 million. Prime Trust went into its bankruptcy proceeding less than a year after the infamous FTX crash of November 2022. Those proceedings ended with founder Sam Bankman-Fried convicted of fraud and sentenced to 25 years in prison in 2024.
In a different case, Celsius filed for bankruptcy in July 2022 after the company’s balance sheets revealed a $1.2 billion deficit and over $4.7 owed to the creditors.
Coinbase is looking to set industry precedent
As a qualified custodian, Prime Trust is expected to protect clients’ assets from financial downturns. However, the company’s bankruptcy highlights a potential flaw in the custodial services frameworks. However, the UCC Article 8 should protect customers in scenarios where the company goes broke.
With its intervention in Prime Trust’s bankruptcy, Coinbase has taken it upon itself to uphold customer assets protection within the crypto industry and outside.
Paul Grewal says “This is bigger than crypto.” The UCC Article 8 is a fundamental part of commercial law, which applies to both digital and traditional financial institutions, which unavoidably are at risk of going through bankruptcy proceedings because of the nature of their business.
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