Will Bitcoin ETFs Sink Morgan Stanley Advisors?

The latest dustup in the cryptocurrency social media space has shone fresh light on the continued uncertainty and disagreement about regulation of spot bitcoin and spot Ethereum ETFs.

A social media post late last week by a known crypto critic triggered the fierce debate about regulatory oversight, and when, why, where, and how crypto ETFs might be appropriate for investors.

John Reed Stark, president of his own Bethesda, Md.-based consulting firm and former head of Internet enforcement at the SEC, ignited the discussion by claiming Morgan Stanley’s decision to let its brokers sell spot bitcoin ETFs to some clients will trigger the “biggest SEC and Finra sweep in history.”

Stark, who will appear on a special edition of the Advisor Upside podcast on Friday, is warning that Morgan Stanley and its advisors have unwittingly invited regulatory repercussions that could result in advisors losing their coveted CFP designations.

Morgan Stanley, which has remained silent throughout the debate that played out on social media and elsewhere, last week became the first major brokerage platform to allow its advisors to solicit clients to buy spot bitcoin ETFs that debuted in January. 

“This is a massive risk for Morgan Stanley and for any of their 15,000 brokers on multiple levels,” Stark said in an interview with etf.com this week.

“This is not an investment that the SEC believes is an appropriate investment for anybody, period, but that doesn’t mean people can’t still sell it,” he added, citing the warnings laid out in the crypto ETF prospectuses.

“If you take your typical bitcoin ETF, you’ll get 100 pages of prospectus and more than half will be related to risk disclosure,” Stark said. “It’s a product that is essentially a mathematical equation; you can’t even measure the risk of investing in crypto.”

Rigorous SEC Review of Spot Bitcoin ETFs

Such claims sparked the ire of Ric Edelman, founder of the Digital Assets Council of Financial Professionals, who dedicated a podcast this week to countering Stark’s claims.

In addition to citing a litany of examples of how and where cryptocurrencies and blockchain are becoming mainstream financial instruments worldwide, Edelman takes specific issue with Stark’s reference to a CFP Board notice about the dangers of crypto investing.

On Stark’s claim that “Certified Financial Planners may lose the CFP credential quickly,” Edelman said Stark is basing that on a CFP Board notice from 2022, almost two years before the debut of the spot bitcoin and spot Ethereum ETFs.

“That is total bullshit,” Edelman said on his podcast. “John Reed Stark does not work for the CFP Board, he does not represent the CFP Board, and the CFP Board has made no such statement. My company, the Digital Assets Council of Financial Professionals, is the official crypto education partner for the CFP Board, and I have never heard them say anything of the sort that John Reed Stark is claiming.”

Morgan Stanley Limits Brokers to IBIT, FBTC

In terms of Stark’s dire warnings of regulatory oversight shortcomings allowing for the sale of spot bitcoin ETFs, it could be argued that Morgan Stanley has aligned itself with two of the strongest names in financial services by limiting its brokers to the $12 billion iShares Bitcoin Trust (IBIT) and the $11 billion Fidelity Wise Origin Bitcoin Fund (FBTC).

“The crypto ETFs got through the SEC in one of the most rigorous processes I’ve ever seen and you’re talking about BlackRock and Fidelity,” said Eric Balchunas, senior ETF analyst at Bloomberg Intelligence.

“Stark is essentially saying Morgan Stanley shouldn’t trust the Securities and Exchange Commission, BlackRock or Fidelity,” Balchunas added.