Kraken trusted Etana Custody with hundreds of millions of dollars in customer funds over several years. When the exchange asked for $25 million back, Etana could not return it. Now Kraken says it knows why.
Payward, Kraken’s parent company, filed a second amended complaint in a Colorado federal court on May 4 accusing Etana and its CEO Dion Brandon Russell of running what it calls a “Ponzi-like enterprise.” The filing alleges Etana mixed customer money with its own, used it to cover operating costs and fund risky investments, and then faked account statements showing everything was fine.
When Kraken tried to withdraw $25 million in reserve funds in April 2025, Etana stalled. It blamed reconciliation issues. It gave misleading explanations. And behind the scenes, according to the lawsuit, it was using new deposits from other clients to fill the hole. That is the textbook definition of a Ponzi structure.
What Did Etana Actually Do With the Money?
The complaint lays out a detailed trail of where the funds went.
At least $16 million was funnelled into promissory notes issued by a firm called Seabury Trade Capital. Those notes later defaulted. The money was never returned. Separately, Etana allegedly used customer assets to run its own foreign exchange hedging strategy and kept whatever profit it made for itself.
Throughout this period, Etana’s dashboards and account statements continued to show customer balances as secure and fully accounted for. Kraken had no reason to suspect a problem because every report it received said the money was there. It was not.
The situation got worse in March 2026 when Amazon Web Services shut down Etana’s cloud account over unpaid bills. That briefly made the firm’s digital asset records inaccessible. When a custody company cannot pay its AWS bill, it tells you everything about the state of its finances.
Matt Turetzky, Kraken’s head of litigation, did not hold back: “If you take our money or deceive our customers, we will find you, we will sue you, and we will not stop until justice has been served.”
How Did Regulators Miss This?
They did not, entirely. Colorado authorities issued a cease-and-desist order against Etana in 2025 and imposed stricter capital requirements. But by then, the damage was already done. Etana entered court-supervised liquidation in November 2025 and is now controlled by a receiver.
The receiver’s findings are grim. Cash on hand stands at roughly $6.83 million. Total liabilities exceed $26 million. Most of that shortfall is the Kraken claim. The receiver is cooperating with Payward by producing documents and making former staff available for questioning.
The federal case against Etana’s corporate entities has been paused because the company is in liquidation. But the case against CEO Dion Russell personally continues. Kraken alleges he had near-total control over daily operations and personally directed the misuse and concealment of funds.
Why Does This Matter Beyond Kraken?
Because it exposes a gap in crypto’s infrastructure that most people assume does not exist.
When you deposit money on Coinbase or Kraken, you assume it goes into a safe account somewhere. You check your balance, see the number, and trust that the money is real. That trust is built on the assumption that whoever holds the funds is keeping them separate from their own money.
Etana was supposed to do exactly that. It marketed itself as a “segregated, bankruptcy-remote custodian”. That language is specifically designed to reassure institutional clients that their assets are ring-fenced from the custodian’s own business. According to Kraken’s lawsuit, it was a lie.
This is not an isolated case. Institutional lender Blockfills filed for bankruptcy in March after halting withdrawals and reporting roughly $75 million in losses. FTX’s collapse in 2022 was the same story at a much larger scale. The pattern keeps repeating: a firm holds customer money, quietly deploys it into risky bets, and collapses when the bets go bad.
Traditional banks face strict rules about segregating customer deposits. Those rules exist because banks learned the hard way, over centuries, that mixing customer money with house money always ends badly. Crypto is learning the same lesson in real time.
What Is Kraken Seeking?
Payward wants at least $25 million in compensatory damages. But the complaint also invokes Colorado’s civil theft statute, which allows for triple damages. That could push the total claim above $75 million before fees and interest. The lawsuit also seeks injunctive relief, a court order stopping Russell from further misconduct, and full legal costs.
Whether Kraken recovers anything depends on the receivership process. Etana has $6.83 million in cash. It owes $26 million. The maths is not good. Insurance proceeds and asset recovery could close some of the gap, but full repayment looks unlikely.
For Kraken’s customers, the exchange has said no user funds were affected. Kraken’s own reserves covered the shortfall. But the fact that one of the industry’s most security-focused exchanges got burned by a custody partner that was running a Ponzi raises uncomfortable questions about how many other custody relationships across the industry are built on the same kind of trust that turned out to be misplaced.
What Can You Do to Protect Yourself?
The Etana case reinforces what security researchers have been saying all year. If your crypto sits on an exchange, you are trusting that exchange and every company it works with behind the scenes. Most of those relationships are invisible to you.
The safest approach has not changed. Keep only what you need for trading on an exchange. Move the rest to a hardware wallet where you hold the keys. If an exchange or its custody partner collapses, a hardware wallet is the only thing that guarantees your funds are still yours.
Kraken caught Etana. But it took a year of stalling, a receivership, and a federal lawsuit to get to this point. The next Etana might not be caught as quickly.
Disclaimer: This article is for informational purposes only and does not constitute financial, investment, or legal advice. Always conduct your own research before making any investment decisions.
