Morgan Stanley’s Spot Bitcoin ETF Move Draws Criticism

Financial services industry consultant John Reed Stark is warning Morgan Stanley that its decision to allow wealth advisors to recommend spot bitcoin ETFs to clients will unleash a wave of regulatory scrutiny.

Stark, president of his own Bethesda, Md.-based consulting firm, did not respond to requests for comment for this story, but posted on X last week that by allowing some of its 15,000 advisors to solicit clients to buy select spot bitcoin ETFs, Morgan Stanley “has just voluntarily subjected themselves to what will likely become the largest SEC and Finra examination sweep in history.”

Stark, author of the 2016 book ‘The Cybersecurity Due Diligence Handbook,’ stirred strong opinions on both sides of the cryptocurrency debate.

“This guy has been against crypto since day one, and he has taken a lot of Ls,” said Eric Balchunas, senior ETF analyst at Bloomberg Intelligence.

“It’s hard to take him too seriously because he doesn’t say how a Morgan Stanley advisor could get into trouble, he just says they could,” he added.

New York-based Morgan Stanley, which declined to comment for this story, last week became the first major brokerage firm to give advisors permission to solicit clients to purchase two of the nine existing spot bitcoin ETFs, the $9.7 billion Fidelity Wise Origin Bitcoin Fund (FBTC) and the $19 billion iShares Bitcoin Trust (IBIT).

Morgan Stanley will allow advisors to offer the bitcoin ETFs only to clients with at least $1.5 million worth of investable assets.

Balchunas speculated that some of Stark’s issue with spot bitcoin ETFs is that the underlying asset doesn’t generate income or pay a dividend like most investments.

“Most people buying crypto don’t care that it doesn’t have dividends or income; they’re looking for something to protect them from government interference,” he said, and cited as an example gold ETFs, which also don’t generate income or pay dividends.

Svetlin Krastev, founder of Black Sea Gold Advisors in Kingston, N.Y., doesn’t think spot bitcoin ETFs will introduce any unique regulatory oversight, considering that they have already gone through multiple rounds of scrutiny in the approval process.

“They are offering a product that is approved by the SEC, so I don’t understand why that would be inviting regulatory scrutiny,” he said.

Increased Regulatory Scrutiny?

But Noah Damsky, principal at Marina Wealth Advisors in Los Angeles and a crypto skeptic, sees the potential of regulators “going after low-hanging fruit” when volatility leads to the kind of big drops that bitcoin had just last week.

“The challenging part about crypto investing is I’m not sure there’s enough data across different market cycles,” he said. “When the Nasdaq was down 3% last week, bitcoin was down 6%. To me this looks like a leveraged beta play.”

Such wild rides are what concern Adam Gana, a New York-based securities lawyer with Gana Weinstein.

“When you start selling bitcoin to Main Street investors, you will find a lot of arbitration to follow,” he said. “I’m confident we’ll be looking back at this, five-to-10 years from now, and saying we told you so.”

Ric Edelman, founder of the Digital Assets Council of Financial Professionals and a member of the etf.com advisory board, dedicated a large portion of his podcast this week to dispelling some of Stark’s claims related to how selling bitcoin violates standards upheld by the CFP Board.

“If you’re a Morgan Stanley FA, if you’re a CFP at Morgan Stanley, heck, if you’re a CFP anywhere, if you’re a financial advisor at any firm, you need to realize that (Stark) has no credibility, is dead wrong about crypto, hates crypto and is for some unexplained reason is simply trying to scare you away from doing what you need to be doing to serve your client’s best interests,” Edelman said. “You need to completely ignore” Stark.