The contagion that everyone in the crypto world feared is coming to fruition, and it may be just the beginning.
Here's the deal: On Wednesday, the lending arm of crypto brokerage Genesis suspended redemptions and new loan originations after an "abnormal" number of withdrawal requests that exceeded its current liquidity, citing market turmoil from the failure of FTX.
(And for those just tuning into this saga, you can catch up on the truly mind-boggling disaster that FTX made of itself here.)
Genesis said it was working with advisers "to explore all possible options," adding that it would release a plan for the lending business next week.
That's a very bad sign.
"In the crypto world, the minute you see a company or firm announce 'we're temporarily halting withdrawals' — yikes," said Daniel Roberts, editor-in-chief of Decrypt Media, a crypto-focused news outlet. "You put them on death watch."
Another big player in the crypto space, BlockFi, halted withdrawals last week as FTX came unglued. And then the Wall Street Journal reported yesterday that the company was preparing for a potential bankruptcy filing.
All of that is just piling onto the mountain of problems for FTX's founder and former CEO, Sam Bankman-Fried.
On Wednesday an FTX investor sued Bankman-Fried as well as several celebrities who have endorsed the platform, including Tom Brady, Gisele Bundchen and Steph Curry.
"The deceptive FTX platform maintained by the FTX entities was truly a house of cards," the proposed class-action lawsuit states.
"FTX were geniuses at public relations and marketing, and knew that ... [it] could only be successful with the help and promotion of the most famous, respected, and beloved celebrities and influencers in the world," wrote one of the lawyers, Adam Moskowitz, in an email.
Representatives for Brady, Bundchen and Curry didn't respond to CNN Business' request for comment.
Lawyers who aren't involved in the case told my colleague Jennifer Korn that a key question in the case will be whether cryptos can be treated as securities under the law. (The Securities and Exchange Commission has said they are; the industry widely disagrees.)
It's not clear from the lawsuit what economic relationship the celebrities had with FTX, says Charles Whitehead, professor at Cornell Law School, who is not involved in the case. But plugging crypto has different implications than, say, endorsing a sports drink or athletic wear.
"Selling an asset that is a financial instrument ... is not the same thing as selling sneakers," Whitehead says. "There are anti-fraud and consumer-protection rules for selling bad sneakers. There are more restrictive rules when you're talking about selling financial assets."
He added: "All these celebrities who are running around and doing these sorts of sponsorships should stop and ask a securities lawyer."
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