The fallout from the spectacular implosion of cryptocurrency giant FTX has triggered a far-reaching cascade of effects: it has ensnared a number of celebrities who have endorsed the now-bankrupt platform, and financial contagion is spreading across the vast ecosystem of cryptocurrencies and digital assets .
On Wednesday, the lending arm of cryptocurrency brokerage Genesis suspended repayments and new loan origins after an “abnormal” number of withdrawal requests exceeded its current liquidity, citing market turmoil from the FTX bankruptcy.
Genesis said it is working with advisors “to explore all possible options,” adding it will release a plan for the loan business next week. “We are working tirelessly to identify the best solutions for the lending business, including, among other things, sourcing new liquidity,” the company said.
Genesis’s lending unit had about $2.8 billion in loan assets in the third quarter, according to its website.
The suspension comes as the entire cryptocurrency industry is on edge following the unraveling of Sam Bankman-Fried’s FTX exchange and hedge fund Alameda Research, both of which filed for bankruptcy late last week.
“In the cryptocurrency world, the second you see a company or business announce ‘we are temporarily halting withdrawals’ – yikes,” said Daniel Roberts, editor-in-chief of Decrypt Media, a cryptocurrency-focused news agency. “Now you warn them about death… It’s unusual for someone to say ‘we’re stopping withdrawals’ and then say, ‘OK, resume withdrawals, we’re good.'”
That “death watch” is not limited to Genesis.
Soon after the company suspended withdrawals, one of its partners, Gemini, the cryptocurrency firm founded by Tyler and Cameron Winklevoss, warned customers that redemptions under its Earn program would be delayed. Twins he said it worked with Genesis to help customers redeem funds from the program, which allowed customers to earn interest on cryptocurrency holdings. No other Gemini products or services were affected, the company said.
Meanwhile, another major player in the crypto space, BlockFi, halted withdrawals last week when FTX uncooked. On Tuesday, The Wall Street Journal reported that BlockFi was preparing for a potential bankruptcy filing.
Naturally, the major players in the crypto space are scrambling to distinguish themselves from FTX and other firms that went bankrupt over the past year due to the collapse in token prices.
One is Brian Armstrong, the chief executive officer of publicly traded exchange Coinbase, who told CNN’s Julia Chatterly on Wednesday that while the fallout is hurting the industry now, it could eventually be good for companies like his.
“Crypto isn’t going anywhere,” he said in an interview, which airs Thursday on First Move. “One bad player doesn’t undermine the whole thing, similar to how Bernie Madoff doesn’t make us question the entire traditional financial system.”
And the legal headaches for Bankman-Fried, the FTX founder who stepped down as CEO last week, are piling up.
An FTX investor on Wednesday sued Bankman-Fried and several celebrities who have endorsed the platform, including Tom Brady, Gisele Bundchen and Steph Curry. “The deceptive FTX platform operated by the FTX entities was truly a house of cards,” the proposed class action lawsuit states.
Heavyweight attorneys Adam Moskowitz and David Boies filed the lawsuit on behalf of an FTX client, Edwin Garrison.
Moskowitz, a Florida attorney, is also behind a class-action lawsuit against cryptocurrency brokerage Voyager Digital, which also filed for bankruptcy earlier this year. And Boies is perhaps best known for representing Vice President Al Gore in the 2000s Bush versus Gore.
In an email to CNN Business, Moskowitz said FTX was “a huge Ponzi scheme bigger than the Madoff scheme.”
“FTX was a PR and marketing genius and knew that… [it] could only succeed with the help and promotion of the world’s most popular, respected and loved celebrities and influencers,” Moskowitz wrote.
Representatives for Brady, Bundchen and Curry did not immediately respond to CNN Business’s request for comment.
Lawyers who are not involved in the case told CNN Business that a key question in the case will be whether cryptocurrencies can be treated as securities under the law. The Securities and Exchange Commission said yes; the industry largely disagrees.
In its heyday, FTX received the endorsement of numerous athletes and celebrities. Brady and Bundchen, notably, acquired an undisclosed equity stake in the exchange in 2021.
It’s not clear from the lawsuit what economic relationship the celebrities had with FTX, says Charles Whitehead, a professor at Cornell Law School, who is not involved in the case. But linking cryptocurrencies has different implications than, say, approving a sports drink or sportswear.
“Selling an asset that’s a financial instrument…is not the same as selling sneakers,” Whitehead says. “There are anti-fraud and consumer protection rules for selling substandard sneakers. There are more restrictive rules when it comes to the sale of financial assets.”
He added, “All these celebs running around and doing these kinds of endorsements should stop and ask a securities attorney.”
In recent days, regulators, policymakers, and even cryptocurrency industry leaders have publicly called on Congress to take action on the cryptocurrency market, which is largely unregulated and lacks clear guidelines for traders.
“The recent failure of a major cryptocurrency exchange and the resulting unfortunate impact for cryptocurrency holders and investors demonstrate the need for more effective oversight of the cryptocurrency markets,” Treasury Secretary Janet Yellen said Wednesday. “Where existing regulations apply, they must be strictly enforced so that the same protections and principles apply to cryptographic assets and services.”
—CNN Business’ Jennifer Korn contributed to this article.