FDUSD Regulatory Brief
Summary
In connection with the allegation posed by Justin Sun regarding First Digital’s solvency, there were associated allegations of deficiencies in the Hong Kong regulatory framework generally that increase the probability of custodial mismanagement and heighten the potential for insolvency to occur.
As a followup to our previous observations, we provide a brief regulatory assessment of First Digital Trust Limited and the independent attestation provider Prescient Assurance LLC, along with insights gleaned from published attestation reports.
Key points include:
- First Digital Trust LTD has a TCSP license, a standard licensing benchmark recognized in the crypto custody industry that constitutes a sufficient means of achieving recognized regulatory status for its custodial operations.
- Attestations do not reveal the names of financial institutions where reserves are held, limiting the possibility of open-source scrutiny into their creditworthiness or financial soundness. This limits the capacity to dispel the accusations made, which may continue to put pressure on FDUSD’s stability.
- The independent attestation provider’s registration with the Public Company Accounting Oversight Board (PCAOB) has been verified.
First Digital Trust Limited
First Digital has endeavored to secure licensing or authorization for custodial services in multiple jurisdictions. Hong Kong is the most prominently listed—particularly in light of public critiques aimed at perceived regulatory shortcomings.
Source: 1st digital legal / regulatory website section
The Hong Kong Securities and Futures Commission has publicized a regulatory initiative focused on custody services. Still, the specifics of that initiative have yet to be formalized, and no new rules or requirements have been mandated for Hong Kong-based entities engaged in custodial functions.
Trust or Company Service Providers (TCSPs) in Hong Kong must obtain a license from the Registrar of Companies to operate legally. Applicants, including their ultimate owners, partners, and directors, are required to pass a “fit and proper” test to ensure their suitability for the role. Once licensed, TCSPs have several key obligations: they must secure prior approval from the Registrar for any changes in ultimate ownership, partnership, or directorship; report any changes in particulars; notify the Registrar before ceasing operations; and comply with anti-money laundering and counter-financing of terrorism (AML/CFT) requirements, including customer due diligence and record-keeping.
Consequently, the TCSP license held by First Digital Trust Limited stands as the sole available and, by extension, sufficient means of achieving recognized regulatory status for its custodial operations. In practice, the TCSP license has evolved into a de facto regulatory benchmark in the crypto custody industry, becoming even more pivotal in light of the SFC Virtual Asset Trading Platform Guidelines, which expressly call for client assets to be safeguarded in trust by entities licensed under the TCSP regime. Our review indicates no recent or pending changes to the TCSP framework.
Attestation Report Insights
According to the Independent Accountant’s Report, FDUSD’s reserve account is “held and managed by a related party, being a public trust company registered in Hong Kong and a custodian for the Company,” which may be reasonably construed to indicate that First Digital Trust Limited manages those reserve accounts. Nonetheless, it remains possible that other First Digital entities, duly authorized for custodial activities, may be involved. The Report mentions that this custodian has opened distinct accounts under its own name for the Company’s benefit, maintained across various financial institutions, including those located in Hong Kong, Singapore, Australia, Canada, Luxembourg, Malta, and the United States.
Holding assets in accounts opened exclusively under the custodian’s name can undermine proper asset segregation. In the event of the custodian’s insolvency, assets held in its name may be folded into the custodian’s bankruptcy estate, placing the Company’s assets at risk. Effective segregation generally demands that client assets remain distinct from the custodian’s proprietary holdings, often involving registering accounts in the client’s name or clearly designating them as client accounts.
The Report asserts that these accounts are all segregated. Nonetheless, our further review underscores a critical transparency concern: there has been no disclosure of the specific financial institutions holding the reserves, which severely impedes meaningful third-party verification.
The principal transparency concern surrounding FDUSD stems from the fact that no disclosure is made of the specific institutions holding the reserves. While the documentation specifies that each financial institution hosting these reserve accounts must meet a minimum Standard & Poor’s short-term local issuer credit rating of “A-2,” the omission of the institutions’ identities hinders independent compliance verification. First Digital’s decision not to reveal the names of these financial institutions, alongside the lack of further operational data about them, significantly limits the possibility of open-source scrutiny into their creditworthiness or financial soundness.
Prescient Assurance LLC
Finally, an inquiry into the auditor’s credibility reveals that Prescient Assurance LLC is a licensed CPA firm. Its registration with the Public Company Accounting Oversight Board (PCAOB) has been verified.
Source: PCAOB, Date: April 2nd, 2025
Source: CPA Verify, Date: April 2nd, 2025
Disclaimer
This review was independently prepared by LlamaRisk, a DeFi risk service provider funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.
The information provided should not be construed as legal, financial, tax, or professional advice.
