Increased Scrutiny on Digital Asset Custodians
U.S. financial regulators are ramping up scrutiny on custodians handling digital assets to mitigate systemic risks, with Fortress Trust being the latest entity to face significant action. On October 24, Bloomberg Law reported that Nevada regulators have issued a cease-and-desist order against Fortress Trust, effectively shutting down its operations due to alarming signs of insolvency and questionable business practices.
Regulatory Actions and Concerns
The Nevada Financial Institutions Division highlighted a troubling “significant mismatch between assets and liabilities,” implying that Fortress Trust was potentially on the verge of financial failure. This order prevents the company from accepting any new deposits or transferring assets, mirroring previous regulatory actions taken against other Nevada-based cryptocurrency custodians that faced collapse.
Founded by Scott Purcell, a former CEO of Prime Trust, Fortress Trust once catered to over 250,000 clients and even attracted interest from Ripple for acquisition—a move that fell through due to a $15 million breach of security in 2023.
Comparisons to Prime Trust
The situation with Fortress shares similarities with the earlier instance involving Prime Trust, which lost access to more than $80 million in customer funds and subsequently entered receivership. Although Fortress emerged from the turbulence surrounding Prime Trust, regulators now argue that it is grappling with parallel structural vulnerabilities.
Nationwide Regulatory Trends
This crackdown on Fortress occurs as regulators across the nation are increasing their oversight of crypto custodians and tightening operational standards. Just weeks prior, on September 30, the Securities and Exchange Commission (SEC) and New York’s Department of Financial Services released updated guidelines for custody agreements, highlighting the need for improved insolvency protections and transparent information regarding risks associated with smart contracts and blockchain technology. This shift may hinder smaller custodians’ ability to comply, thus prompting further consolidation within the sector.
Additionally, an SEC roundtable in April discussed the ongoing risks tied to inadequate infrastructure and the unreliability of untested smart contracts, which leave customers vulnerable to financial losses. This contributed to discussions about whether new frameworks should be established for specialized crypto broker-dealers that manage assets outside traditional banking systems.
Broader Enforcement Actions
The recent enforcement actions in Nevada extend beyond only custodians; for example, a federal judge recently upheld a cease-and-desist order against Crypto.com, preventing it from offering certain event contracts related to sports betting. This landscape underscores Nevada’s commitment to imposing strict regulations on digital assets, as regulators strive to avert future failures and safeguard consumer investments in an environment fraught with insolvency concerns.
