A Fortress of Distrust
Happy Friday, Fintech Nerds!
I hope you’ve had a good week.
For me, it has been a little weird. Yesterday, in particular.
In the span of 24 hours, we learned that Chauncey Billups and Terry Rozier had been arrested by the FBI for their involvement in illegal gambling schemes. We learned that President Trump had pardoned Binance founder Changpeng Zhao, whose crypto exchange has been boosting the Trump family's own crypto venture. And we learned (courtesy of Jason Mikula) that Evolve Bank’s new CEO, Bob Harthemier, had been arrested by the FBI for two child pornography-related charges.
Really tough day.
I hope today is better.
And I look forward to seeing many of you in Las Vegas soon.
- Alex
#1: A Fortress of Distrust Copy anchor linkCopied
What happened?Copy anchor linkCopied
Fortress Trust, a Nevada-licensed trust company that provides crypto custody services, has been issued a cease and desist order by the Nevada Financial Institutions Division:
The overall financial condition of Respondent [Fortress Trust] has considerably deteriorated to a critically deficient level, and Respondent is now in a position where it is in an unsafe or unsound condition to transact business and/or if it were to continue to operate it would be in an unauthorized and/or unsafe manner.
Respondent has materially and willfully breached its fiduciary duties to its customers by failing to safeguard and reconcile assets under its custody and is unable to meet all customer disbursement requests.
So what?Copy anchor linkCopied
I know the crypto trust/custody world is a bit outside my normal coverage here at Fintech Takes, but given that this is breaking news (first reported by Bloomberg) and that crypto-related custody services and regulated trusts and trust banks are becoming a bigger deal since the passage of the GENIUS Act, I figured I’d make an exception.
Plus, the full story here is much longer and stranger than you might think.
The story starts with a guy named Scott Purcell. I’ll let him introduce himself (from a March 2021 interview):
I’m a serial entrepreneur who’s had both wonderful successes and heartbreaking failures. I have a lot of history and experience in the securities and internet industries, having started numerous broker-dealers, a trust company that serviced broker-dealers and their institutional fixed income clients, one of the world’s first commercial internet service providers, and a music encoding and streaming business. These all led to my current FinTech endeavors of Prime Trust, which provides financial infrastructure to fintech innovators, and Banq, which is a next-generation mobile banking app built specifically for business payments.
He left out Kasidie.com, an online hub for swingers, which he also founded. But I digress.
The relevant business venture, for our story, is Prime Trust.
Prime Trust was founded in 2016 to provide crypto custody and other related services to institutional customers. In late 2021, the company reportedly lost access to some of its customers’ wallets and, in order to satisfy those users’ withdrawal requests, Prime Trust started using customer fiat funds (from its omnibus account) to purchase additional crypto assets. This continued until March of 2022 and created a hole in the company’s balance sheet of approximately $85.7 million, alongside smaller crypto and equity deficits. In June of 2023, Nevada’s regulator issued a cease-and-desist, saying Prime Trust’s condition had “considerably deteriorated” and it was unable to honor customer withdrawals. BitGo, a different crypto trust company, briefly explored an acquisition of Prime Trust at that time, before pulling out, resulting in the company being taken into receivership by the Nevada regulator and a bankruptcy proceeding being initiated.
However, undeterred by this failure, Scott Purcell (who left Prime Trust sometime in 2021) founded a new company — Fortress NFT Group — focused initially on providing the infrastructure to mint, hold, and sell NFTs (Remember, this was 2021 … NFTs were still an idea that lots of people believed in). In setting up Fortress, Purcell allegedly took “employees, trade secrets, intellectual property, technology, business opportunities, and equipment” from Banq (a neobank-like subsidiary of Prime Trust), which also filed for bankruptcy in 2023.
At some point, Purcell changed the name from Fortress NFT to Fortress Blockchain Technologies and pivoted the company to crypto custody services, creating a subsidiary — Fortress Trust. The company raised a $22.5 million seed round in 2022, led by Ayon Capital. Later that year, it also raised an undisclosed amount of capital from Ripple, and Fortress Trust acquired a trust company license from the state of Nevada.
And this is where history really started to repeat itself. In August 2023, Retool — a developer platform that companies use to build internal tools — was hacked. The attackers gained administrative access to Retool’s systems, which gave them access to the Retool-built back-office systems and workflows of 27 Retool customers, including, you guessed it, Fortress Trust!
The attackers promptly stole $15M of Fortress Trust customers’ crypto.
Ripple, an investor in Fortress, stepped up to make the impacted customers whole (loaning Fortress Blockchain Technologies $15M) and briefly explored the idea of acquiring Fortress before backing out. Shortly thereafter, Scott Purcell stepped down as CEO of Fortress Blockchain Technologies and was eventually replaced by Anthony Botticella. According to his LinkedIn profile, Botticella had previously served as Co-Founder, Chief Trust and Operations Officer at Fortress Trust, from November 2021 to March 2023 (the hack happened in August 2023). Before that, he served as Chief Trust Officer at Prime Trust from March 2021 to November 2021 (the company reportedly lost access to legacy wallets in December 2021).
Astute observers at this point will note that the hack and the subsequent loan from Ripple happened more than two years ago.
What, you might ask, has Fortress been doing since?
Based on my conversations with sources close to the situation, the company appears to have been pursuing an acquisition. However, by the time it became clear that the acquiring company wouldn’t be able to close, Fortress had burned through all of its remaining runway and didn’t have the time and resources necessary to pursue alternate paths, such as attempting to trace and recover the stolen crypto.
And that brings us back to the cease and desist order from the Nevada Financial Institutions Division, which is likely to be followed in short order by receivership. However, unlike Prime Trust, a voluntary bankruptcy proceeding is unlikely in this case, as there is little left to recover (Nevada’s C&D order states that Fortress has roughly $200,000 in cash and around $1 million in crypto on hand).
So, what does all of this mean?
Well, first of all, investors should never give Scott Purcell money ever again (there are other, very unsavory reasons for this as well).
Second, I find it strange how close Prime Trust and Fortress Trust (multiple times) were to being bailed out of their mistakes by acquisitions from other crypto platforms. This is a pattern of behavior in crypto that was very prevalent in 2021 and 2022 (FTX was the most infamous practitioner). I think it demonstrates how desperate crypto companies (and their investors) have been to maintain the perception of safety for an ecosystem that is still very young. I’ll be curious to see if this desperation persists (or even increases) as we settle into the post-GENIUS era.
And third, even though the problems at Prime Trust and Fortress Trust had different root causes, I think they illustrate the elevated danger of custodying crypto assets and the urgent need for regulation and better industry standards in this area. Crypto custody presents unique risks because digital assets can be stolen or moved instantly, without recourse. Unlike traditional custodians that can reverse transactions or rely on intermediated settlement, crypto transfers are irreversible and hinge on the security of private keys, where one compromised credential can drain an entire account. The constant connectivity of “hot wallets,” global 24/7 settlement, and reliance on third-party vendors expand the attack surface far beyond that of banks or securities custodians. Commingling of assets, unclear legal ownership, and inconsistent oversight compound the problem, leaving customers exposed when a custodian fails or is hacked. In fact, Coinbase recently got involved in the Prime Trust bankruptcy in order to ensure that the specific legal and operational mistakes that Prime Trust made don’t lead to a damaging precedent for the entire crypto ecosystem.
#2: Super AggregatorsCopy anchor linkCopied
What happened?Copy anchor linkCopied
Quiltt, a super aggregator, raised some money:
Today, we’re excited to announce the close of our $2.6m priced seed equity round led by NVP Capital, with participation from Mastercard, K Street Capital, Mintaka, Abstraction Capital, and others. As part of the financing, we are welcoming Dan Borok as our first outside board member. We’re also grateful for the participation of many of our existing investors and customers.
This new capital will be used to power the next wave of investments into our platform, infrastructure and partner ecosystem. More importantly, we will double down on our core thesis:
For Open Banking to become a force for good, it needs more interoperable plumbing, less commercial friction and fewer walled gardens to climb over.
So what?Copy anchor linkCopied
I wrote about super aggregators last year. Here’s a quick refresher:
Super aggregators build an abstraction layer that sits above all of the individual open banking data aggregation providers. This creates interoperability for the end client, which is then able to build orchestration workflows for utilizing different aggregators in different situations in a way that optimizes cost and conversion rate. For example, based on their different coverage profiles, a client might use Plaid to pull data for a customer trying to connect to a fintech company and use MX to pull data for a customer trying to connect to a community bank.
This is exactly what Quiltt does, working to create interoperability across all the major data aggregators, and, in the case of a few of them, actively reselling their services (I noted, with interest, the participation in this funding round from Mastercard, which owns Finicity).
It’s an interesting time to be a super aggregator.
As I have been writing about recently, the open banking data aggregation space has become a lot less friendly in the last few months. Plaid defected from the rest of the fintech ecosystem and struck a deal with JPMorgan Chase to pay for access to the bank’s open banking APIs. This deal locked in cost certainty for Plaid (even though that cost was higher than it had been previously), and motivated the company to aggressively push towards a more verticalized, walled garden approach to both product development and go-to-market. A good example is Plaid’s new cash flow underwriting score — LendScore — which is built on a combination of cash flow data and proprietary Plaid network insights. Crucially, the score is only available to companies that use Plaid to access the bank transaction data. This requirement, which Plaid justifies because of the value of its network insights, helps lock customers into the Plaid ecosystem.
Quiltt (and other super aggregators) are trying to disrupt this vendor lock-in.
As I wrote in last year’s essay on super aggregators, this is all just a little bit of history repeating:
Equifax, Experian, and TransUnion recognized the danger of selling a commoditized product (suppliers have no pricing power), so they set about finding ways to both drill down – differentiating their data products by buying up or partnering to acquire alternative sources of data – and to build up the credit decisoning stack – bundling their data with additional value-added services, including credit decisioning software, and, later, the VantageScore.
This is why credit bureau aggregation services offered by other vendors were so strategically annoying to the credit bureaus. They undermined the moat they were trying to build around their commoditized core product. They made it illogical to standardize on one credit bureau (regardless of how much you liked a specific part of their stack) because, with aggregation, you could seamlessly orchestrate your credit decisioning process across a best-of-breed collection of data, analytics, and technology products from a multitude of different providers.
#3: Financial NihilismCopy anchor linkCopied
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Apparently, this is a thing that exists?
So what?Copy anchor linkCopied
Someone on Twitter tagged me in a retweet of this tweet (in an effort to raise my blood pressure, I presume), so … let’s talk about it!
In June, Coverd raised $5.9M from investors, including Yolo Investments, a16z (of course), Volt Capital, Tusk Ventures, WndrCo, and Arbitrum Gaming Venture. In September, it launched this app.
The way it works (I think?) is that users connect their credit or debit cards to the Coverd app, which tracks purchases and turns them into entries to “win back” what they spend. Each transaction earns the user “Coverd Cash” (the in-app sweepstakes currency), which can be used to buy tickets into Coverd’s sweepstakes-style games, where players can win real money toward their bills, rent, or card balance. Users can also earn bonus “Coverd Cash” through promotions, referrals, or by buying “Practice Coins”.
The “Practice Coins” appear to be Coverd’s primary source of revenue at the moment. They are kinda like microtransactions in video games. The user is spending real money (Coverd doesn’t disclose on its website what “Practice Coins” cost, but I imagine they’re sold as bundles for somewhere between $1 and $10 a pop) to acquire the game’s fake currency, which, in the case of Coverd, can then be used for the chance to earn real money back.
Coverd calls them “Practice Coins” because they are trying to operate under sweepstakes law (and avoid being classified as illegal gambling), which requires that users be able to participate for free. So, in this case, the user buys “Practice Coins,” which have no value, and then they just so happen to get free bonus “Covered Cash” which they can use to play in more of Coverd’s sweepstakes-style games.
God … I think I lost 25 IQ points just trying to explain that … I’m so sorry.
Anyway, if this feels pointless and bizarre and depressing to you, I would have to agree. According to the Co-founder and CEO of Coverd, the point of the product isn’t to help users spend less money or save money, but rather to make spending more exciting:
We didn't build Coverd to help people inhibit their spending; we built it to make spending exciting. We let spenders win twice – the second time is when they play it back and win. Our users want immediacy and upside. Coverd gamifies transactions with real financial leverage, meeting users where they are and turning spending into a moment they look forward to.
This is exactly the design philosophy that you want to hear from a company that is planning to launch a credit card (fused with this existing lottery model) in Q1 of 2026.
More broadly, this is the kind of product that increases young consumers’ feelings of financial nihilism. Look at the Coverd’s Twitter posts. It’s a bunch of memes designed to reinforce Gen Zers’ default belief that they are irrevocably screwed, financially, and they might as well spend all day sitting in their apartment, shopping online, and spinning a virtual prize wheel in the vague hope of winning back a small portion of the money they have already wasted.
Gen Zers deserve better. Their feelings of financial nihilism aren’t completely unfounded. Cost of living is a massive issue right now, and the paths to long-term prosperity are shifting rapidly, after decades of stability. However, it’s not hopeless. And it’s our job, working in the financial services industry, to bolster young adults’ confidence, not prey on their insecurities.
MORE QUESTIONS TO PONDER TOGETHER
Big news for the endlessly curious (yes, you): I’m collecting your fintech questions on a rolling basis.
What’s keeping you up at night? What great mysteries in financial services beg to be unraveled? Think of it this way, if a stranger is a friend you just haven't met yet, your question is a Fintech Takes conversation waiting to happen.
One that could headline a Friday newsletter or be answered in an upcoming Fintech Office Hours event.
Drop your question here, whenever inspiration strikes!
MONEY20/20 SPOTLIGHT
The fun starts next week! Here’s where I’ll be!
(And P.S., there is still time to join many of these!)
💰 Deepfakes, Real Risk: Fighting Fraud in an Age of Synthetic Identity | 10/26 | 3–3:30pm PT
I’m thrilled to be moderating this discussion at Money20/20, featuring the head of fraud at Varo and the co-founders and CEOs of SentiLink and Oscilar.
🍽️ Leaders in Fintech Dinner | 10/26 | 6–9pm PT
Join Luke Voiles (CEO of Pipe) and yours truly for an intimate evening of sushi, sake, and smart conversation. It’ll be an exclusive gathering of fintech execs and leaders. Space is limited; request to join us here.
☕ Nova Credit Coffee + Conversation | 10/27 | 8:15am–10:30am PT
Start the AM with lending leaders unpacking the real-world journey of cash flow analytics (where to begin, how to apply it, and what it takes to make it work). Breakfast, networking, and discussion included! RSVP here.
🍸 MX Happy Hour Panel: Data into Action | 10/27 | 3:30pm–6pm PT
Small panel conversation featuring Jane Barratt (Chief Advocacy Officer, MX) and yours truly (among others!), followed by drinks and hors d’oeuvres at The Grand Lux Cafe, Venetian. RSVP here.
🍸 Fundbox After Hours | 10/27 | 7:30pm–9:30pm PT
Come join me and Prashant Fuloria (CEO of Fundbox), among others, for a fireside chat on embedded small business capital (with leaders from Ant Group, Autobooks, Intuit, and ZenBusiness). Stay for the 1:1 conversations over drinks and bites, of course! RSVP here.
🥯 Astrada Breakfast Discussion | 10/28 | 8–10am PT
Join Salman Syed (CEO of Astrada) and yours truly for a lively AM conversation on data, AI and open banking. Who will win as the battle lines are redrawn? Bring your hunger and curiosity to Bouchon at The Venetian. RSVP here.
FINTECH TAKES: BUILDERS SUMMIT
As you may know, Fintech Takes is hosting our first-ever in-person event on November 12th and 13th in the mountains outside Bozeman, Montana.
The Fintech Takes: Builders Summit is the industry event that I’ve always wanted, but have never quite been able to find. We are bringing together experienced founders and operators from banking and fintech — the folks who are actually building products in our industry — and giving them the content and networking opportunities they need to find (and understand) the next big problem they are going to tackle.
If that sounds like something you’d be interested in participating in, apply to attend or hit reply to this email to get more information on sponsorship opportunities. We still have room, but it is going fast!
Thanks for the read! Let me know what you thought by replying back to this email.
— Alex
