Nevada regulators issued a cease-and-desist order dated October 22 against crypto custodian Fortress Trust, now known as Elemental Financial Technologies Inc., citing the firm as on the verge of insolvency with a liquidity position “wholly inadequate to meet customer obligations.”
According to Bloomberg, the state’s Financial Institutions Division found Fortress owes clients more than $8 million in fiat currency and $4 million in crypto at current prices, while holding less than $200,000 in cash and only around $1 million in crypto on hand.
The custodian admitted it cannot meet customer withdrawal requests and failed to produce basic financial documentation, including account reconciliations and recent monthly statements.
Financial Difficulties From Previous Leadership
Current CEO Anthony Botticella, who assumed the position in December 2023, stated in a signed declaration, “I learned after assuming the position of Chief Executive Officer that the Trust was experiencing severe financial difficulties and challenges related to events that occurred prior to assuming my role.”
“These pre-existing issues materially affected the Trust’s ability to continue as an ongoing viable entity,” he added.
Fortress was unable to provide financial statements for July, August, or September, according to the Nevada regulator.
The shutdown follows a troubled history for Fortress Trust, which was founded by Scott Purcell, the former CEO of Prime Trust.
In 2023, Ripple backed out of an acquisition deal after Fortune published a story revealing that Fortress had lost nearly $15 million in a hack involving third-party vendor ReTool.
The incident occurred just 20 days after Ripple initially announced its intent to acquire the custodian, with Purcell telling Bloomberg at the time that a third-party service was breached, but his company hadn’t been directly hacked.
$15M Security Breach
The security incident in September 2023 involved San Francisco-based ReTool, a company serving Fortune 500 clients that constructed the portal allowing several Fortress clients to manage cryptocurrency funds.
ReTool confirmed it fell victim to a phishing attack affecting 27 of its customers, targeting a specific group of crypto-oriented clients.
The attack left those who configured ReTool’s software as recommended unaffected, with the company emphasizing “Although an attacker had access to Retool cloud, there was nothing they could do to affect on-premise customers.“
Ripple made a $15 million down payment to help Fortress reimburse affected customers as part of their acquisition deal.
Fortress initially covered most affected customers, with Ripple stepping in to ensure all clients were made whole within a week.
BitGo and Fireblocks, the wallet providers used by Fortress, clarified that their systems were not breached.
Swan Bitcoin, a brokerage firm that uses Fortress’ BitGo wallets for client funds, confirmed that the coins stored in those wallets remained secure throughout the incident.
Ripple CEO Brad Garlinghouse announced the company would not proceed with the Fortress Trust acquisition just 20 days after the initial announcement.
Garlinghouse stated that while the Fortress team was “incredibly talented and had built products solving real customer problems,” the company decided to retract its acquisition offer.
Purcell downplayed the acquisition’s cancellation to Cointelegraph, calling it “not a big deal” and saying the change in plans was unrelated to the security incident.
Nevada Tightens Crypto Custody Oversight
The Fortress case took a similar pattern to Nevada’s earlier enforcement against Prime Trust, which lost access to more than $80 million in customer funds and was later placed into receivership.
Fortress served over 250,000 clients before the cease-and-desist order effectively halted its operations.
The regulator barred Fortress from accepting new deposits or transferring assets, mirroring prior actions taken against other failed Nevada-based crypto custodians.
Nevada’s enforcement wave has extended beyond custodians. Earlier this year, a federal judge upheld a cease-and-desist order blocking Robinhood from offering sports betting-related event contracts. Robinhood, however, sues back.
Following these repeated oversights, the Federal Reserve, FDIC, and OCC issued updated custody guidance that requires clearer insolvency protections and disclosures regarding smart contract and blockchain risks.
The post Nevada Shuts Down Fortress Trust Over Insolvency appeared first on Cryptonews.
