Nevada Shuts Down Fortress Trust Due to Insolvency

Nevada Shuts Down Fortress Trust Over Insolvency

Nevada regulators have issued a cease-and-desist order against Fortress Trust, now known as Elemental Financial Technologies Inc., due to suspected insolvency. With significant liabilities exceeding $12 million and only a fraction of cash and crypto available, the company has admitted it cannot fulfill customer withdrawal requests. This closure follows a history of financial troubles, including a significant security breach earlier this year.

Key Takeaways

Nevada regulators halted operations of Fortress Trust, identifying severe liquidity issues.
Fortress Trust owes clients over $12 million but holds less than $200,000 in cash.
Financial difficulties stem from challenges faced before the new CEO took over.
A major security breach earlier this year led to significant losses for the firm.
Nevada is tightening oversight of cryptocurrency custodians following this incident.

Fortress Trust's Shutdown

Regulators in Nevada issued a cease-and-desist order against Fortress Trust on October 22, citing that the crypto custodian, now known as Elemental Financial Technologies Inc., is on the brink of insolvency due to a liquidity position that is "wholly inadequate to meet customer obligations."

According to a report from Bloomberg, the Nevada Financial Institutions Division discovered that Fortress Trust owes its customers over $8 million in fiat currency and approximately $4 million in cryptocurrency, while it currently has less than $200,000 in cash and just around $1 million in crypto assets.

The firm has acknowledged its inability to meet withdrawal requests and has struggled to provide essential financial documentation, including recent monthly statements and account reconciliations.

Financial Struggles Linked to Previous Leadership

Anthony Botticella, the current CEO who took over in December 2023, stated in a signed declaration that he discovered significant financial difficulties within Fortress Trust, related to issues that arose prior to his leadership. He noted that these existing problems had a material impact on the Trust's ability to function as a viable business.

According to the Nevada regulator, Fortress was unable to present financial statements for key months—July, August, or September.

This shutdown comes after a troubled history for Fortress Trust, founded by Scott Purcell, who was also the CEO of Prime Trust. Earlier this year, Ripple chose not to move forward with an acquisition after reports emerged revealing that Fortress had incurred losses of nearly $15 million from a hacking incident involving a third-party vendor, ReTool.

$15 Million Security Breach

In September 2023, Fortress Trust faced a significant security breach with San Francisco-based ReTool, a company that provides services to major clients, including Fortress Trust. ReTool confirmed it was attacked in a phishing incident that targeted several of its crypto-oriented clients.

Although the attack did compromise ReTool's systems, the company clarified that the integrity of its on-premise customers, like Fortress, remained intact because potential attackers could not impact these setups.

Ripple had initially committed $15 million to help Fortress compensate the clients affected by this breach, ensuring they were reimbursed within a week, even as Fortress managed to cover most affected clients independently.

BitGo and Fireblocks, the wallet providers for Fortress, confirmed that their systems remained secure during this incident. Swan Bitcoin, which relied on Fortress’ BitGo wallets for customer funds, also confirmed that all assets remained safe throughout the situation.

Just 20 days after this security breach, Ripple CEO Brad Garlinghouse announced that the company would not proceed with its acquisition of Fortress Trust. He noted that while Fortress had a talented team and created valuable products, the decision to retract the offer was ultimately made despite the security incident.

Nevada Strengthens Oversight on Crypto Custodians

The situation with Fortress Trust mirrors a previous case involving Prime Trust, which lost access to over $80 million in customer funds and was later placed into receivership. Before the cease-and-desist order, Fortress Trust was serving more than 250,000 clients.

Regulators have prohibited Fortress from accepting new deposits or transferring assets—actions that reflect similar measures taken against other failed crypto custodians in Nevada.

This recent enforcement action signals a trend, as Nevada has also acted against other financial entities, including a federal judge recently upholding a cease-and-desist order that restricted Robinhood from offering specific betting-related contracts.

In response to these challenges, regulatory bodies such as the Federal Reserve, FDIC, and OCC have issued updated guidance to enhance custody protection for digital assets, emphasizing the need for clear disclosures concerning insolvency risks and the dangers associated with blockchain and smart contracts.