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FTX investor sues Tom Brady, Gisele Bundchen and others as crypto contagion spreads

New York(CNN Business) The fallout from the spectacular implosion of crypto giant FTX has triggered a cascade of wide-reaching effects: It's ensnared a number of celebrities who endorsed the now-bankrupt platform, and financial contagion is spreading across the vast crypto and digital-asset ecosystem.

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.

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. "We're working tirelessly to identify the best solutions for the lending business, including among other things, sourcing new liquidity," the company said.

Genesis' lending unit had about $2.8 billion in active loans in the third quarter, according to its website.

The suspension comes as the entire crypto industry is on edge following the unraveling of Sam Bankman-Fried's FTX exchange and Alameda Research hedge fund, both of which filed for bankruptcy late last week.

"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 now ... It's unusual that someone says 'we're halting withdrawals' and then they say, 'OK, withdrawals back on, we're good.'"

That "death watch" is not confined to Genesis.

Soon after the company suspended withdrawals, one of its partners, Gemini — the crypto firm founded by Tyler and Cameron Winklevoss — warned customers that redemptions under its Earn program would be delayed. Gemini said it was working with Genesis to help customers redeem funds from the program, which allowed customers to earn interest on crypto holdings. No other Gemini products or services were affected, the company said.

Meanwhile another big player in the crypto space, BlockFi, halted withdrawals last week as FTX came unglued. On Tuesday, the Wall Street Journal reported BlockFi was preparing for a potential bankruptcy filing.

Of course, major players in the crypto space are rushing to distinguish themselves from FTX and other firms that have gone bust in the past year as token prices have slumped.

One is Brian Armstrong, the CEO of publicly traded exchange Coinbase, who told CNN's Julia Chatterly on Wednesday that even though the fallout is hurting the industry now, it may ultimately be a positive for companies like his.

"Crypto is not going anywhere," he said in an interview, which will air Thursday on First Move. "One bad player does not undermine the entire thing — similarly to how Bernie Madoff doesn't cause us to question the entire traditional financial system."

Lawsuit names Tom Brady, Gisele Bundchen, others

And the legal headaches for Bankman-Fried, FTX's founder who resigned as CEO last week, are piling up.

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.

Heavyweight lawyers Adam Moskowitz and David Boies filed the suit on behalf of an FTX customer, Edwin Garrison.

Moskowitz, a Florida lawyer, is also behind a class-action suit against crypto broker Voyager Digital, which also filed for bankruptcy earlier this year. And Boies is perhaps best known for representing Vice President Al Gore in 2000's Bush v. Gore.

In an email to CNN Business, Moskowitz alleged FTX was "a massive Ponzi scheme larger than the Madoff scheme."

"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," Moskowitz wrote.

Representatives for Brady, Bundchen and Curry didn't immediately respond to CNN Business' request for comment.

Lawyers who aren't involved in the case told CNN Business 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.

In its heyday, FTX received endorsements from several athletes and celebrities. Brady and Bundchen, notably, took 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, 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."

Growing calls for regulation

In recent days, regulators, policy makers, and even crypto industry leaders have publicly called for Congress to take action on the crypto market, which is largely unregulated and lacks clear guidelines for traders.

"The recent failure of a major cryptocurrency exchange and the unfortunate impact that has resulted for holders and investors of crypto assets demonstrate the need for more effective oversight of cryptocurrency markets," Treasury Secretary Janet Yellen said in a statement Wednesday. "Where existing regulations apply, they must be enforced rigorously so that the same protections and principles apply to crypto assets and services."

—CNN Business' Jennifer Korn contributed to this article.

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