Payward Inc., the parent of crypto exchange Kraken, has sued former custody partner Etana Custody and its CEO, Dion Brandon Russell, alleging they misappropriated more than $25 million of client funds, according to a second amended complaint filed Monday in the U.S. District Court for the District of Colorado. Kraken alleges the Wyoming-based custodian, currently in Chapter 11 bankruptcy, ran a "Ponzi-like" scheme by commingling custodial assets, using them for operating expenses and risky investments, and reporting client holdings as intact. Payward said it routed hundreds of millions of dollars to Etana over several years through a fiat on-ramp partnership. The dispute escalated after Kraken sought to withdraw roughly $25 million in reserve funds in April 2025. The exchange claims Etana delayed the request by citing what Kraken calls fabricated reconciliation problems and misleading explanations. The complaint alleges Etana did not have sufficient funds to meet the withdrawal and depended on new deposits to plug shortfalls. "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," Kraken head of litigation Matt Turetzky said in emailed comments. Etana did not respond to a request for comment by publication time. The filing comes as counterparty risk remains a central concern in crypto markets, where users often rely on exchanges, lenders and custodians to safeguard assets. With fewer standardized controls than traditional finance, verifying whether customer funds are fully backed can be difficult. High-profile collapses such as FTX and failures among smaller custodians have repeatedly shown how quickly confidence can unravel when that assumption breaks. Kraken, founded in 2011 and operated by Payward, offers spot and derivatives trading as well as custody and staking services, supporting assets including bitcoin (BTC) and ether (ETH) along with fiat on- and off-ramps. Etana provided fiat on- and off-ramp services and held customer assets for exchanges including Kraken. The complaint details several alleged misuse episodes. Kraken says Etana deployed at least $16 million of Kraken-related funds into promissory notes issued by Seabury Trade Capital that later defaulted, and that the money was never returned and may have been used to cover company expenses. Etana is also accused of using customer assets to finance a foreign-exchange hedging strategy while keeping any investment income for itself. Kraken alleges Etana continued to issue account statements and dashboard updates showing balances as secure and fully accounted for despite internal deficits. Regulatory pressure intensified in 2025, the lawsuit says, when Colorado authorities issued a cease-and-desist order and raised capital requirements. Etana entered liquidation proceedings in November 2025 and is now controlled by a court-appointed receiver. Payward is seeking at least $25 million in damages, potential treble damages under civil theft claims, injunctive relief and attorneys' fees. The suit also targets Russell personally, alleging he exercised near-total control over Etana's operations and directed the misuse and concealment of funds. The case follows other recent liquidity strains in the sector. Institutional lender Blockfills filed for bankruptcy in March after halting withdrawals, reporting roughly $75 million in losses and facing a lawsuit alleging misuse of customer funds.