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Gemini and Genesis Could Kill Crypto. For Good.

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The recent crypto rally could be coming to an end. This past week, prominent coins like Bitcoin (BTC-USD), Ethereum (ETH-USD) and Solana (SOL-USD) have been rising steadily. Unfortunately for investors, though, some bad news out of New York is threatening to curtail the recent crypto market progress.

New York State Attorney General Letitia James has recently made headlines for her prosecution of former President Donald Trump. But today, news broke that James has some new targets — two prominent crypto exchanges, to be exact. James has filed a lawsuit against both Genesis and Gemini for fraudulent activity involving more than 230,000 investors. This type of crypto regulation could end up benefiting investors in the long term, but will likely damage public trust in the near future, just like the fall of FTX.

Should investors be prepared for a crypto winter as temperatures drop and James turns up the heat on these crypto leaders? Let’s take a closer look.

Is More Crypto Regulation Coming?

This lawsuit comes as the most high-profile trial in the history of crypto also kicks off. FTX founder Sam Bankman-Fried recently began the process of attempting to defend himself in court after a scandal that some thought would be the end of crypto. While markets have survived, there is a good chance that the high-profile legal event will compel policymakers to zero in on further crypto regulation.

The case against Genesis and Gemini may not be as high-profile as the Bankman-Fried trial, but it’s no small legal matter. Indeed, the suit alleges that the two firms defrauded investors of more than $1 billion. Of the 230,000-plus group, roughly 30,000 are New York residents. As City & State New York reports:

“Gemini offered a product called ‘Earn,’ which allowed investors to deposit their cryptocurrency and earn interest – similar to a savings account at a bank, but with much higher interest rates. Gemini then lent customers’ cryptocurrency holdings to the crypto trading firm Genesis, which in turn invested them in extremely risky ways. When the bottom fell out of the cryptocurrency market last year, Genesis’ investments went bust. Genesis could no longer pay back Gemini, which could no longer pay back the ordinary customers who had entrusted it with their life savings.”

The lawsuit alleges that Genesis “lied to Gemini about its financial health,” hiding its losses which exceeded $1 billion. In fact, the platform needed parent Digital Currency Group to provide $1.1 billion in bailout funds. James’ case also argues that “Gemini misled its investors by portraying ‘Earn’ as a low-risk investment, even though it knew that lending money to Genesis was very risky.” If the lawsuit succeeds, Gemini, Genesis, Digital Currency Group and several prominent executives will be banned from conducting business in New York.

What Comes Next?

The need for more crypto regulation had already become apparent over the years, but when illegal activity took FTX under, that need became impossible to ignore. Indeed, the fall of the leading exchange platform sent crypto markets into disarray, undermining public trust in the digital asset class. Now, James’ lawsuit threatens to expand on that. While further regulation remains a strong possibility in the long term, in the short term, the case against Genesis and Gemini is likely to drive crypto prices down as investors’ trust is compromised.

On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Samuel O’Brient has been covering financial markets and analyzing economic policy for three-plus years. His areas of expertise involve electric vehicle (EV) stocks, green energy and NFTs. O’Brient loves helping everyone understand the complexities of economics. He is ranked in the top 15% of stock pickers on TipRanks.