Segregation of duties

Graduate · enrolled learners

This lesson opens with Prime Trust, 2023.

What happened

Prime Trust was a Nevada trust company that held crypto assets for other businesses and their customers. Nevada's Financial Institutions Division petitioned for receivership in June 2023, having determined it was operating in an unsafe and unsound manner and was insolvent: per the petition it owed clients about 85.7 million dollars in fiat currency against about 2.9 million dollars on hand. The chain of failure was operational, not a hack: around December 2021 the company found it could not access a set of legacy wallets, and per the petition, from December 2021 to March 2022 it bought crypto using customer money from its omnibus accounts to satisfy withdrawals from the inaccessible wallets, so a controls failure became a solvency hole. What was missing was segregation of duties, the separation that would have put the person moving customer funds, the person approving the movement, and the person reconciling customer assets against obligations into different hands, so that using one customer's assets to paper over another's could not be initiated, approved, and hidden by the same people. The loss of the wallet was a mistake; the ability to conceal it with customer money was a controls absence.

The decision point

Prime Trust did not fail because someone lost a wallet; wallets are lost, and that is what controls exist to survive. It failed because the same institution that lost the wallet could quietly reach for customer funds to cover the gap, with no independent hand required to approve the movement or reconcile the books against what was owed. Segregation of duties is the control that makes concealment structurally hard: the person who can initiate a movement of assets is not the person who approves it, and neither is the person who reconciles the institution's holdings against its obligations to customers. When those three are separate, a single actor cannot move funds, wave the movement through, and hide the resulting shortfall, because each step passes through a different person whose job is to notice. On this lesson's reading, Prime Trust is what one set of hands doing all three looks like: a recoverable mistake became an insolvency because nobody independent stood between the mistake and the customer assets.

Recorded loss

$85,000,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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