On September 9, 2025, Payward Inc., the parent company of the Kraken exchange, filed a second amended civil lawsuit in the U.S. District Court for the District of Colorado, suing its former custody partner Etana Custody along with its CEO Dion Brandon Russell. The lawsuit alleges that this company, which provides custody services for crypto institutions and platforms, did not "safeguard" assets as stipulated in the contract, but instead misappropriated at least $25 million of client funds, turning what should have been a segregated and transparent custody pool into a funding black box whose levels are unclear to anyone.

More severely, Payward claims in the complaint that Etana’s operational model has deviated from the necessary form of custody business, beginning to operate like a "pseudo-Ponzi" structure — mixing different clients' funds together, using incoming money to fill old holes, obscuring the real funding gaps layer by layer, and misleading both partners and end clients. In the crypto industry, this complete distrust in custodians is far more than a commercial dispute between two companies; it strikes at the soft underbelly of the entire infrastructure layer: when you hand your assets over to a counterparty for custody, are you gaining a safety net or handing over the power of life and death? This time, the rift between Kraken and Etana provided a brutal answer.

The Custody Partner Turns Hostile: How the Relationship Deteriorated

At the beginning of the story, the relationship between Kraken and Etana was not as torn as it is today. As a cryptocurrency exchange, Kraken needed someone to "watch the warehouse" — to safeguard clients' fiat or digital assets, handle large inflows and outflows, and ensure that the numbers on the books corresponded to genuine redeemable funds. This was almost standard in the industry: the front end was a flashing matching engine and trading page, while the back end comprised professional custodial institutions responsible for asset protection, account management, and compliance interfaces. Etana Custody marketed itself as such, offering custody services to crypto institutions and platforms, hoping to become the "invisible safe" between these platforms and their clients.

According to unverified information, the collaboration between Kraken and Etana began around the early 2020s. At that time, the crypto market was rapidly maturing in terms of infrastructure, and exchanges were more willing to outsource part of their funds and operations to seemingly professional custodians rather than absorbing all the risks onto their own balance sheets. Kraken placed some of its clients' funds and its own reserves into Etana's "safe," while Etana publicly emphasized its responsibility for asset safety, account tier management, and fund scheduling, with both parties seemingly clear on their roles: one responsible for matching transactions and front-end experience, the other for fund custody and back-end security.

In specific arrangements, according to unverified information, Kraken allocated about $25 million to Etana as part of the reserved funds for the custody arrangement. This money was, by design, supposed to serve as a dual safety net for the users and the platform: clients believed that storing funds behind the exchange had an independent custodial institution adding a layer of security; the exchange also believed that entrusting reserve funds to the custodian would reduce its own operational risks. However, this structure had one prerequisite — the custodian had to truly achieve asset segregation and transparent management. Once the custodian's use of these funds diverged from the expectations of its partners, this layer of "safety net" would reverse into a single point bet on the custodian's credit, transforming client funds from being properly safeguarded to being directly exposed to counterparty risks, structurally planting a concealed and fatal seed for the subsequent collapse of trust.

$25 Million Withdrawals Blocked: Withdrawal Issues Ignite the Lawsuit

When the custody structure had already become a systemic single point risk, what truly made the crisis move from potential to overt was the attempt to "pull the cushion." According to unverified information, during 2025, Kraken attempted to withdraw approximately $25 million in reserve funds from Etana — money that was originally seen as a safety buffer that could be redeemed anytime but practically became stuck in a black box on the other end. Payward described in the complaint that Etana did not execute orders quickly and mechanically like a traditional custodial relationship but was accused of repeatedly delaying or even substantively obstructing the withdrawal by citing "discovering new issues" and "requiring additional reviews." For a trading platform that relies on high liquidity, this "unable to withdraw" experience equated, at a critical moment, to finding a fire hydrant without water.

In Payward's view, this was no longer a simple operational hiccup but a concentrated explosion of more dangerous signals. The complaint interprets this blocked withdrawal as one of two possibilities: either Etana had not maintained the reserve funds in a readily available state as agreed, or the funds had been misappropriated elsewhere, leading to a "gap in the pool." In the second amended complaint submitted to the U.S. District Court of Colorado, Payward lists this failed withdrawal as one of the core pieces of evidence for Etana's failure to fulfill custodial obligations, alleging that Etana violated the most fundamental promises of liquidity and safety in the custodial relationship. For Payward, this $25 million is not an abstract number but a current test of whether the entire custody arrangement remains trustworthy; when the test result is "unable to withdraw," resorting to legal action shifts from a long-term concern to a passive and sole recourse.

Ponzi-Like Allegations: The Dangerous Game of Using New Money to Fill Old Holes

In Payward's narrative, Etana is accused of fundamentally failing to fulfill the most basic "asset segregation" obligations of a custodian. The complaint states that Etana did not separately maintain clearly verifiable funds for each institutional client but rather mixed different clients' funds into the same pool, using internal accounting to "draw lines." Once funds are pooled in this manner, it becomes impossible to ascertain whose reserve funds are still intact and whose have been misappropriated; the only remaining fact is the custodian’s report.

More damaging is the cash flow logic depicted by Payward: Etana is accused of using funds from newly entering clients to fulfill withdrawal demands from existing clients, a structure described by Payward as "similar to a Ponzi scheme." The distinction is that this has been wrapped in the guise of custodial services, and on the surface, all participants believe they are dealing with a safe position that can be withdrawn at any time rather than relying on an array of subsequent funding to fulfill fragile promises.

Once the custodial model slips into this pattern, the collapse of trust is no longer merely a commercial dispute but a prelude to systemic risk. The complaint, in conjunction with external information, points toward further escalation: reports indicate that Etana received a cease and desist order from Colorado state regulators and subsequently entered liquidation, with a court-appointed receiver taking over. This implies that the regulators no longer view the issue as a simple contract dispute but rather require mandatory procedures to protect the overall creditor landscape from potential crisis. Though as of now, there has not been a detailed public response from Etana regarding these "Ponzi-like" allegations, this turmoil has already served as a sufficient caution to any institutions that rely on third-party custody — a custodial structure filling old holes with new money, once exposed, will instantly shift from a business issue to a disaster concerning survival and compliance fate.

Crumbling Custodial Trust: Amplified Counterparty Risks in Crypto

After Payward Inc. sued Etana in the Colorado federal court, the dispute has become more than just a matter of contract interpretation and has been interpreted by many market participants as a public demonstration regarding "counterparty risk." Commentators point out that this case once again lays bare the vulnerabilities at the infrastructure layer of crypto: when a custodian regarded as a "safe backup" is accused of misappropriating at least $25 million of client funds and operating in a "Ponzi-like" manner, exchanges and end clients are not merely watching a lawsuit that does not concern them but are forced to confront a reality — the end of the chain they trusted may be in a distorted state for a long time.

In custodial relationships, asset segregation and transparency are originally two weights on the trust scale. Payward’s complaint claims that Etana failed to achieve client asset segregation and instead mixed funds from different clients, using new client funds to meet old client withdrawal demands; under this structure, the apparent "orderliness" of balances and the normality of daily inflows and outflows mask the risks that have long been accumulating deep within the accounts. The brief mentions that when custodians lack transparency and asset segregation, trust can be eroded, and risks often go undetected until a crisis erupts, which implies that exchanges, like Kraken, that depend on custodians may remain unaware of real funding gaps for a significant period, until a substantial withdrawal is repeatedly delayed or obstructed, realizing that their and their clients' funds are locked in the counterparty's asset black box.

This structural opacity can amplify impacts layer by layer along the custodial chain. Custodians like Etana stand at an infrastructural position, connecting platforms like Payward on one end and institutional clients and end-users on the other; once accused of having a "Ponzi-like" operational model, the impact transcends the loss of a single account and challenges the foundation of the entire custodial model. Some commentators believe this case has become a typical example of the trust crisis in the crypto custody field, intensifying industry concerns about fund safety and the misrepresentation of custodians; in the crypto industry, exchanges and institutions that rely on third-party custodians have repeatedly faced credit collapses at the infrastructure level, leading to counterparty risks being seen as one of the systemic hazards. This turmoil further prompts institutions and retail investors to reassess whether to fully outsource trust to a custodial brand or leave sufficient safety cushions in business design, risk control, and information disclosure to avoid being passively confronted with counterparty risks the next time infrastructure collapses.

Pursuing Accountability or Settling: The Ongoing Custody Game

On the legal front, the civil lawsuit filed by Payward in the Colorado federal court is still at the stage of back-and-forth motions and evidence exchanges. Public information indicates that Etana has yet to issue a complete and systematic public response regarding the core allegations of misappropriating at least $25 million and operating in a "Ponzi-like" manner; there is also a lack of verifiable details on whether the case has officially gone to court or if both parties have begun or advanced settlement negotiations. Even though reports indicate that Etana has received a regulatory "cease-and-desist order" and entered liquidation, with a court-appointed receiver intervening, this merely reflects a disposal path within regulatory and bankruptcy frameworks and does not directly address a sharper question: to what extent has the custodian deviated from the trust contract with the exchange and clients?

On the Kraken side, according to a single source, its litigation leader Matt Turetzky emphasized publicly that they would seek accountability from anyone who misappropriated Kraken's funds or deceived its clients, stating that they "will not stop until justice is served." This statement serves both as an inquiry into the mission of the custodial funds and as a stance attempting to rebuild user trust through public litigation — sending a signal to the market: once the custodial chain experiences issues, the exchange will not choose silence to pay the price. Going forward, the case may lead to several outcomes: either clarifying custodial responsibility boundaries through judgment or fading from the public eye under opaque settlement terms. However, whichever occurs, what will truly be spotlighted is how the entire industry rewrites the rules of the custodial game. Commentators have already begun to call for exchanges to strengthen due diligence when selecting custodians, to embed asset segregation into executable contracts and operational processes, and to enhance disclosure standards regarding fund flows and risk exposures; only when the custodial relationship evolves from "brand trust" to "structured constraints and transparent oversight," will the market avoid once again passively bearing the costs under the shadow of counterparty risks when similar events occur.

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