Investor Alert: Who Is Liable When a Crypto Custodian Fails? Lessons From the Kraken vs. Etana Custody Dispute

As litigation between Kraken and Etana Custody unfolds, a critical legal question is coming into focus: who is responsible when crypto custody breaks down and investor funds are lost or inaccessible?

While many investors assume that the platform they used is accountable, the reality is often more complex.

The Liability Problem in Crypto Custody

Crypto platforms frequently operate using multi-layered custody structures, where:

• The exchange facilitates transactions
• A third-party custodian holds assets
• Additional intermediaries may process transfers

This fragmentation can create gaps in accountability, particularly when funds are mismanaged, delayed, or unavailable.

In the Kraken–Etana dispute, allegations of misappropriation and improper handling of funds highlight how these structures can fail (U.S. District Court filing: https://dockets.justia.com/docket/colorado/codce/1:2025cv02829/247230).

Potentially Liable Parties

Depending on the facts, multiple parties may bear responsibility:

1. The Custodian
If assets were not properly segregated or were misused, custodians may face direct liability for:

• Conversion or misappropriation
• Breach of contractual obligations
• Failure to safeguard client assets

2. The Exchange or Platform
Even when a third party holds assets, exchanges may be liable if they:

• Misrepresented how funds would be held
• Failed to conduct adequate due diligence on custodians
• Continued to route client funds despite known risks

3. Introducing Brokers or Advisors
If the investment was recommended, liability may extend to those who:

• Promoted the platform without disclosing risks
• Failed to understand the custody structure
• Overstated safety or liquidity

The Regulatory Gap

Unlike traditional brokerage accounts, crypto custody arrangements are not always subject to uniform safeguards.

The U.S. Securities and Exchange Commission has proposed expanded custody rules to address how investment advisers safeguard client assets, including digital assets (www.sec.gov/news/press-release/2023-30). However, the regulatory framework remains incomplete and evolving.

This lack of standardization can leave investors exposed when custody failures occur.

What Investors Should Look For

If you experienced losses or withdrawal issues, key questions include:

• Who actually held your assets?
• Were funds segregated or commingled?
• What representations were made about custody and security?
• Were there delays or restrictions on withdrawals?

These factors are central to determining whether legal claims may exist.

Recovery Options May Be Available

Investors affected by crypto custody failures may have claims involving:

• Misrepresentation or omission
• Breach of fiduciary duty
• Negligence or failure to safeguard assets
• Unjust enrichment or conversion

In some cases, recovery may be pursued through litigation, arbitration, or coordinated claims efforts depending on how the investment was structured.

Sonn Law Group Is Investigating

Sonn Law Group is actively investigating crypto-related losses involving custody failures, platform risk, and third-party exposure.

If you were unable to access your funds or suffered losses tied to a crypto platform or custodian, you may have legal options to pursue recovery.