Key Takeaways:
Payward, the parent company of crypto exchange Kraken, has accused former custody partner Etana and its CEO of misappropriating more than $25 million in client funds in what the firm called a “Ponzi-like” scheme, according to a second amended complaint filed May 4 in the U.S. District Court for the District of Colorado.
"Kraken has millions of users and hundreds of billions of dollars in quarterly transaction volume. We did not get here by rolling over. If you take our money or deceive our customers, then know this: we will find you, we will sue you, and we will not stop until justice has been served," Matt Turetzky, head of litigation at Kraken, said in emailed comments.
The lawsuit alleges Etana commingled customer reserves with company money, funneling at least $16 million into promissory notes from Seabury Trade Capital that later defaulted. When Kraken attempted to withdraw roughly $25 million in April 2025, the suit claims Etana stalled because it lacked the liquidity and was using new deposits to cover prior shortfalls.
The case highlights the critical issue of counterparty risk in the crypto industry, where the failure of a custodian can lead to significant losses for clients. Etana entered statutory liquidation in November 2025, with court-appointed receivers indicating cash holdings of only $6.83 million against liabilities exceeding $26 million, leaving Kraken’s recovery prospects uncertain.
The lawsuit outlines several instances of alleged misuse of funds. Beyond the $16 million invested in the defaulted Seabury notes, Kraken claims Etana used customer assets to finance a foreign-exchange hedging strategy, retaining the profits for itself. Throughout this period, Etana allegedly issued dashboard balances and account statements that showed customer funds as fully secured, concealing the internal shortfalls.
The situation escalated when Colorado regulators issued cease-and-desist and suspension orders in 2025, leading to the firm's liquidation. The case against the Etana entities is stayed due to the receivership, but the lawsuit proceeds against CEO Dion Brandon Russell personally, holding him liable for fraud and civil theft. The receiver is cooperating with Payward by providing documents and access to former staff.
The dispute underscores the operational risks that persist in the digital asset market. Unlike traditional finance, where asset segregation and insurance are standardized, crypto platforms have faced numerous high-profile failures, from FTX to smaller custodians like Etana, demonstrating how trust can be broken when funds are not truly ring-fenced. This incident serves as another reminder for users to scrutinize the custody solutions used by exchanges. In a related development showing the industry's focus on security, Binance recently launched a "Withdraw Protection" feature to safeguard users from physical coercion, a different but equally potent threat.
Kraken is seeking damages of at least $25 million, with the potential for treble damages under civil theft claims.
This article is for informational purposes only and does not constitute investment advice.
