Commingling

What Is Commingling?

Commingling refers to the practice of combining customer funds or assets with a company's own money in the same accounts. In traditional finance, commingling is prohibited for broker-dealers, investment advisers, banks, and other regulated financial institutions because it breaks the legal separation between customer property and company property.

When funds are commingled, customers lose the ability to identify and recover their specific assets if the company becomes insolvent. Instead of being returned directly to customers, commingled funds become part of the company's bankruptcy estate, where they are divided among all creditors: bondholders, vendors, and other parties who may have higher priority claims.

In the crypto industry, commingling has been at the center of several high-profile collapses. Companies that held customer crypto assets mixed them with their own trading capital, used them as collateral for loans, or deployed them in risky yield strategies without customer consent. The result was billions of dollars in customer losses and a wave of regulatory action that ultimately led to legislation like the GENIUS Act.

How It Works

Commingling can take several forms, from simple accounting failures to deliberate fraud. Understanding the mechanics helps clarify why regulators treat it so seriously.

Account-Level Commingling

The most basic form occurs when a company deposits customer funds into the same bank account it uses for operating expenses. If the company holds $10 million in customer deposits and $5 million in its own capital in a single account, there is no way to distinguish which dollars belong to which party. If the company spends $12 million, it has effectively used $7 million in customer funds without authorization.

Asset-Level Commingling

In crypto custody, commingling often occurs at the asset level. A custodian may hold customer Bitcoin in the same wallet as its own Bitcoin, or pool customer assets across a single address without maintaining internal records that track individual ownership. When combined with rehypothecation (re-lending or reusing customer assets), the original customer deposits can become impossible to trace.

Operational Commingling

More subtle forms involve using customer funds for company operations without moving them into the same account. A company might borrow against customer deposits, pledge them as collateral for corporate loans, or invest them in illiquid assets while maintaining the appearance of segregation. The funds may be technically in separate accounts but are economically commingled because the company's obligations create claims against them.

Case Studies in Crypto

FTX and Alameda Research

The collapse of FTX in November 2022 is the defining example of commingling in the crypto industry. FTX, then the second-largest crypto exchange by trading volume, filed for bankruptcy on November 11, 2022, after a liquidity crisis revealed that approximately $8 billion in customer deposits were missing.

Investigations revealed that FTX had been transferring customer funds to Alameda Research, its affiliated trading firm, since at least 2019. A secret backdoor in FTX's code allowed Alameda to maintain a negative balance on the exchange, effectively drawing on customer deposits without limit. Customer funds were used to finance venture capital investments, real estate purchases, political donations, and Alameda's trading positions. FTX's terms of service stated that customer assets belonged to customers and would not be used for the company's own purposes, making the commingling both a breach of contract and criminal fraud.

In November 2023, a jury convicted FTX founder Sam Bankman-Fried on seven counts including wire fraud and conspiracy. He was sentenced to 25 years in prison in March 2024 and ordered to forfeit $11 billion. The CFTC separately obtained a $12.7 billion judgment against FTX and Alameda in August 2024, comprising $8.7 billion in restitution and $4 billion in disgorgement.

Celsius Network

Celsius Network, a crypto lending platform, filed for Chapter 11 bankruptcy in July 2022. A critical issue in the proceedings was whether customer deposits constituted property of the estate or property of the customers. A bankruptcy judge ruled in January 2023 that assets in Celsius's "Earn" accounts (approximately 600,000 accounts worth $4.2 billion at the time of filing) belonged to Celsius, not to depositors, because the platform's terms of service transferred ownership of deposited crypto to Celsius upon deposit.

While Celsius's terms technically authorized its use of customer assets, the practical effect was identical to commingling: customers believed their funds were safe and accessible, but Celsius had deployed them into risky DeFi strategies and illiquid investments. When those positions lost value, customer withdrawals could not be honored. Former CEO Alex Mashinsky was later sentenced to 12 years in prison for fraud and market manipulation.

Voyager Digital

Voyager Digital filed for bankruptcy in July 2022 after its largest borrower, Three Arrows Capital, defaulted on a $650 million loan. Voyager had marketed itself as a safe place to hold crypto and falsely implied that customer USD deposits were FDIC-insured. In reality, the FDIC insurance applied only to the underlying bank (Metropolitan Commercial Bank), not to Voyager's own failure. The FDIC and Federal Reserve issued a cease-and-desist order, and the FTC permanently banned Voyager from handling consumer assets.

Legal Protections Against Commingling

Segregated Accounts

The primary defense against commingling is the requirement to maintain segregated accounts: dedicated accounts that hold only customer funds, separate from all company operating accounts. In traditional finance, SEC Rule 15c3-3 (the Customer Protection Rule) requires broker-dealers to maintain a Special Reserve Account that holds customer cash and securities separate from the firm's proprietary assets. As of January 2025, the SEC requires daily (rather than weekly) reserve computations for broker-dealers that owe large amounts to customers.

For crypto custodians, segregation means maintaining separate wallets or addresses for customer assets, with clear on-chain and off-chain records linking each deposit to its owner. Some custodians use omnibus wallets (single addresses holding assets for many customers) with internal sub-ledgers, while others create individual wallets per customer for full on-chain segregation. The NYDFS requires custodians to "separately account for and segregate customers' digital assets from the corporate assets of the custodian and its affiliated entities."

FBO Account Structures

FBO (For Benefit Of) accounts are a common mechanism for holding customer funds at FDIC-insured banks. In an FBO structure, a fintech company opens a bank account titled "For Benefit Of" its customers, with an internal ledger tracking each customer's balance. The key legal feature is that funds in an FBO account are considered property of the beneficial owners (the customers), not the company holding the account.

FBO accounts can provide FDIC pass-through insurance of up to $250,000 per beneficial owner, but only if the account records accurately identify each owner and their balance. The 2024 collapse of Synapse Financial demonstrated the limitations of FBO structures: when the middleware provider failed, discrepancies between its internal ledger and the underlying bank records left customers unable to access their funds for months.

Bankruptcy Remoteness

Bankruptcy remoteness refers to legal structures designed to ensure that customer assets are protected even if the company managing them goes bankrupt. The goal is to place customer funds outside the "bankruptcy estate" so that they cannot be claimed by the company's creditors.

Common bankruptcy-remote structures include trust accounts (where a trustee holds assets for the benefit of customers), special purpose vehicles (separate legal entities that hold only customer assets), and statutory protections that explicitly exclude customer property from an insolvent company's estate. The effectiveness of these structures depends on proper maintenance: commingling destroys bankruptcy remoteness by making it impossible to distinguish customer property from company property.

The Celsius case illustrated a critical nuance: even if assets are technically segregated, contract terms that transfer "all right and title" to the platform can defeat customer claims in court. Structural protections must be paired with terms of service that preserve customer ownership.

The GENIUS Act and Commingling

The GENIUS Act, signed into law in July 2025, includes some of the strongest anti-commingling provisions in U.S. financial regulation. The law directly addresses the failures exposed by FTX, Celsius, and other crypto collapses by establishing clear rules for stablecoin reserves.

• Reserves must be "segregated and not commingled with the issuer's operational funds" at all times
• Reserves cannot be rehypothecated (lent out or used as collateral) except under narrowly defined conditions
• In bankruptcy, reserve assets are excluded from the issuer's estate and treated as property of stablecoin holders
• Stablecoin holders receive superpriority status over all other creditors, including administrative expenses
• Monthly public disclosure of reserve composition, examined by a registered accounting firm, with CEO and CFO certification of accuracy
• Penalties of up to $1 million per violation per day for non-compliant issuers

These provisions mean that a GENIUS Act-compliant stablecoin issuer cannot legally commingle reserves with operating funds, and even if commingling occurs through fraud, stablecoin holders have the strongest possible claim in bankruptcy proceedings. This represents a significant improvement over the 2022 collapses, when crypto customers were often treated as unsecured creditors with no priority. For a deeper analysis of the law's full framework, see GENIUS Act: Stablecoin Regulation Explained.

Why It Matters

Commingling is not just a technical accounting issue: it determines whether customer funds survive a company failure. The difference between a company that segregates customer funds and one that commingles them is the difference between customers getting their money back and customers waiting years in bankruptcy court to receive pennies on the dollar.

For stablecoin users, the commingling question is especially important because fiat-backed stablecoins derive their value entirely from the reserves backing them. If an issuer commingles reserves with operating funds, a single bad quarter could wipe out the backing for billions of dollars in stablecoins, causing a depeg event that ripples across the entire crypto ecosystem.

Platforms like Spark that support stablecoins on Bitcoin infrastructure benefit from the regulatory clarity the GENIUS Act provides around reserve segregation. When stablecoin reserves are properly segregated and bankruptcy-remote, users can hold and transact with stablecoins knowing that the underlying assets are legally protected regardless of what happens to the issuer. Self-custodial solutions further reduce commingling risk by keeping assets under the user's direct control rather than in a custodian's pooled accounts.

Risks and Considerations

Detection Challenges

Commingling can be difficult to detect from the outside. Companies may publish attestation reports showing adequate reserves at a specific point in time while commingling funds between reporting periods. On-chain analysis can reveal some forms of commingling (particularly when customer crypto is moved to trading addresses), but fiat reserves held at traditional banks are only visible through audits and regulatory examinations.

Omnibus vs. Segregated Wallets

Many crypto custodians use omnibus wallets that hold assets for multiple customers in a single address. While this is not commingling per se (the assets still belong to customers, not the company), it creates risk if the custodian's internal ledger becomes inaccurate or if the custodian fails to maintain clear records of beneficial ownership. True per-customer segregation provides the strongest protection but comes with higher operational costs and more complex key management.

Cross-Jurisdictional Gaps

Anti-commingling rules vary significantly across jurisdictions. While the GENIUS Act sets clear standards for U.S. stablecoin issuers, and the EU's MiCA regulation establishes its own requirements, many crypto companies operate in jurisdictions where segregation rules may be weaker or unenforced. Users should verify that any custodian or stablecoin issuer they use is subject to enforceable segregation requirements in a credible regulatory jurisdiction.

This glossary entry is for informational purposes only and does not constitute financial or investment advice. Always do your own research before using any protocol or technology.