Commingling

Commingling is the mixing together of money or assets that are supposed to be kept separate. In finance, it most often means a business mixing its customers' funds with its own, for example by holding them in the same bank account or crypto wallet, or by using customer money to pay its own expenses or investments. Brokers, banks, payment firms, lawyers, trustees and crypto exchanges are generally required by law or regulation to keep client assets apart from their own, and commingling is one of the most common findings in enforcement cases after a firm fails.

The word has some neutral uses too. A "commingled fund" is a pooled investment vehicle in which many investors' money is invested together under one manager, which is legitimate as long as each investor's share is recorded. In company and family law, commingling of personal and business money, or of separate and shared property, can affect liability and how assets are divided. This entry focuses on commingling of client funds.

Imagine a dog walker who keeps the keys to clients' homes on the same ring as her own. Nothing goes wrong as long as she is careful. But if she loses the ring, or is tempted to borrow something from a client's house, everyone is affected at once, and it becomes hard to tell whose keys were whose.

Client money works the same way. If a firm keeps customers' money in a separate account marked as theirs, it stays safe even if the firm goes bankrupt, because creditors of the firm cannot touch it. If the money is mixed into the firm's own account, it can be spent by accident or on purpose, and in a collapse customers may end up queuing with every other creditor for whatever is left.

Rules against commingling serve several purposes:

• Protection in insolvency. Properly segregated client assets are generally kept out of a failed firm's estate, so customers can get them back faster and in full.
• Preventing misuse. Separation makes it harder for a firm to use client money for its own trading, lending or expenses.
• Clear records. Separate accounts make reconciliation and audits easier, so shortfalls are spotted quickly.
• Fiduciary duty. Firms holding money for others act as a fiduciary and must put clients' interests first.

In the United States, broker-dealers must follow the Securities and Exchange Commission's customer protection rule, which requires customer cash and securities to be held in reserve or segregated accounts. Futures brokers must keep customer funds separate under rules enforced by the Commodity Futures Trading Commission, an idea described under segregation of funds. In the UK and the European Union, payment and e-money firms must protect customer money through safeguarding, and investment firms follow client money rules. Lawyers and estate agents hold client funds in a trust account. Many US money transmitter laws require licensees to hold permissible investments equal to outstanding customer obligations.

When the US broker MF Global collapsed in 2011, about $1.6 billion of customer money was found to be missing because segregated funds had been used to meet the firm's own needs; customers were eventually repaid after a long recovery process. The 2022 collapse of the crypto exchange FTX revealed large-scale commingling: customer deposits had been routed to and used by its affiliated trading firm, Alameda Research, and founder Sam Bankman-Fried was convicted of fraud in 2023. Other crypto lenders that failed in 2022 held customer assets in pooled wallets alongside their own, leaving customers as unsecured creditors in bankruptcy proceedings.

Crypto exchanges usually hold customer coins in omnibus wallets, where many customers' coins sit together on-chain. This is not commingling in itself, provided the exchange keeps accurate records of each customer's share and does not mix them with its own coins. Tools such as proof of reserves aim to show that the exchange holds enough assets to cover customer balances, though they do not prove that liabilities are fully disclosed. Regulations such as the European Union's MiCA now require crypto-asset service providers to segregate client assets and keep them out of reach of the firm's creditors. Robust segregated accounts, independent audits and daily reconciliation are the main defences against commingling.