The legal battle between Kraken and Etana Custody has escalated with new allegations of a Ponzi-like scheme. Kraken’s parent company, Payward, has filed an updated complaint in a Colorado federal court, claiming that Etana and its CEO, Dion Russell, misused over $25 million in client assets. According to the filing, Etana mixed custodial funds with its own operating money, made high-risk investments totaling $16 million through promissory notes from Seabury Trade Capital, and provided fake account statements to hide the growing shortfall.
When Kraken tried to retrieve about $25 million in reserves in April 2025, Etana delayed the process, citing fabricated reconciliation issues. The complaint describes the operation as a Ponzi-like venture that used new client deposits to cover earlier deficits. At least $16 million of the missing funds are tied to notes from Seabury Trade Capital, which has since defaulted.
Etana entered state-supervised liquidation in November 2025, following a cease-and-desist order from Colorado regulators. Court documents reveal that Etana had only $6.83 million in cash against liabilities of over $26 million, with Kraken’s claim representing the bulk of that debt. While the federal case against Etana entities is on hold, proceedings against Russell individually are moving forward.
Kraken is seeking at least $25 million in compensatory damages, possible treble damages under civil theft laws, injunctive relief, and legal fees. The complaint holds Russell personally accountable, alleging he had complete control over Etana’s operations and directly oversaw the misuse and concealment of funds.
This case is part of a broader trend of custody failures in the crypto industry. For instance, Blockfills, an institutional lender, filed for bankruptcy in March 2026 after reporting about $75 million in losses. The outcome of the Etana lawsuit could set a precedent for how courts handle custodians that commingle client funds, especially those already under state liquidation.
The timing is significant as the industry advocates for clearer custody regulations, such as the CLARITY Act, which aims to establish stronger frameworks for managing digital assets. A Senate Banking Committee markup is expected around mid-May. Kraken has also faced other security incidents in 2026, including an extortion attempt that compromised around 3,000 accounts.