Morgan Stanley could face SEC scrutiny after allowing its financial advisers to promote Bitcoin ETFs to high-net-worth clients, according to former SEC official John Reed Stark. Meanwhile, the SEC settled fraud charges with Ideanomics over misleading financial reporting, and crypto exchanges Gemini and Coinbase pushed back against a proposed CFTC rule that bans event contracts on decentralized prediction markets. Additionally, Tornado Cash developer Alexey Pertsev is still facing serious legal challenges and mounting costs.
Crypto Skeptic Warns Morgan Stanley of Massive SEC Scrutiny
The largest wealth manager in the United States, Morgan Stanley, is potentially facing some regulatory scrutiny after allowing its financial advisers to pitch spot Bitcoin exchange-traded funds (ETFs). The firm’s 15,000 brokers started recommending Bitcoin products to high-net-worth clients, but attracted criticism from John Reed Stark, a former official at the U.S. Securities and Exchange Commission (SEC) and a known crypto skeptic.
Stark warned that by allowing its advisers to promote Bitcoin ETFs, Morgan Stanley has exposed itself to what could become an extensive examination by the SEC and the Financial Industry Regulatory Authority (FINRA). Stark is also concerned that the firm’s decision could lead to numerous compliance violations, making it an easy target for regulators.
He also pointed out that the SEC and FINRA will have immediate and extensive access to Morgan Stanley’s records, including documents, emails, texts, voicemails, and phone conversations related to Bitcoin sales to retail investors. This accessible data could lead to rigorous enforcement actions. Stark even referred to the situation as Morgan Stanley’s “death wish.”
The criticism emerged after reports that Morgan Stanley authorized its advisers to recommend BlackRock’s iShares Bitcoin Trust and Fidelity’s Wise Origin Bitcoin Fund. Despite the potential regulatory challenges, the move is seen by some in the crypto industry as a big step forward.
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Haseeb Qureshi, managing partner at the crypto venture fund Dragonfly, suggested that this endorsement could lead to large inflows into Bitcoin ETFs during the latter half of the year. Since the approval of spot Bitcoin ETFs in January, these products have attracted close to $17.3 billion in inflows.
Ideanomics Settles SEC Fraud Charges
For now, the SEC still has its hands full with other legal battles. The regulator has reached a settlement with electric vehicle company Ideanomics over charges of fraud related to financial reporting and misleading the public about the company’s performance.
According to the SEC, an investigation revealed that between 2017 and 2019, Ideanomics and several senior executives made serious misrepresentations about the company’s financial performance, particularly concerning revenue from crypto assets.
The SEC alleged that Ideanomics falsely reported over $40 million in revenue for 2019 based on fraudulent accounting related to a crypto asset transaction. This false reporting then led to overstated financial statements, which misled shareholders and the public about the company’s true financial health.
The investigation implicated many key figures at Ideanomics, including former chairman and CEO Zheng Wu, current CEO Alfred Poor, and former chief financial officer Federico Tovar. It was revealed that these people engaged in multiple fraudulent activities, like issuing false revenue guidance in 2017, providing a fraudulent letter of intent to the company’s auditor, and concealing Wu’s personal interest in companies doing business with Ideanomics.
As part of the settlement, all of the parties involved agreed to resolve the charges without admitting or denying the SEC’s findings. Wu consented to pay more than $3.3 million in disgorgement, prejudgment interest, and a $200,000 penalty. He also agreed to a 10-year ban from holding any directorship or managerial position in a public company.
Tovar and Poor each agreed to cease-and-desist orders and will pay $75,000 in penalties. Tovar is also facing a two-year ban from practicing as an accountant. Ideanomics itself will pay a $1.4 million penalty and has agreed to engage an independent compliance consultant to improve its internal accounting controls.
Gemini and Coinbase Challenge CFTC’s Proposed Rule
Meanwhile, the crypto exchange Gemini recently urged U.S. regulators to withdraw a proposed rule that would ban all event contracts on decentralized prediction markets. In an Aug. 8 letter to the U.S. Commodity Futures Trading Commission (CFTC), Gemini shared some of its concerns about the negative impact regulation like this would have on prediction markets, particularly those used for forecasting elections.
Screenshot of the letter sent to the CFTC (Source: X)
Cameron Winklevoss, co-founder of Gemini, also spoke out against the proposed rule on social media, and pointed out the transparency and integrity that crypto prediction platforms like Polymarket offer. He argued that these platforms require participants to have “skin in the game,” unlike polls or expert opinions, which boosts their credibility. Winklevoss also called decentralized prediction markets an innovation with real public utility, and urged the CFTC to withdraw the proposal.
Coinbase, another major crypto exchange, also voiced its own objections. Coinbase's chief legal officer, Paul Grewal, argued that the proposal overlooks the public benefits of prediction markets. He called for the CFTC to work with academic, industry, and policy stakeholders to create a more balanced approach that supports innovation while still protecting the public interest.
This pushback from the crypto industry comes as some U.S. politicians have renewed their calls for the CFTC to ban betting on the 2024 presidential election. In a recent letter to CFTC Chair Rostin Benham, five senators and three representatives argued that these prediction markets could interfere with elections and erode public trust in democracy.
Alexey Pertsev Faces Uphill Battle as Legal Costs Mount
In other legal news, the legal battle involving Tornado Cash developer Alexey Pertsev has reached a critical stage, and he is asking for additional funding to continue his fight for privacy rights and the freedom to publish code. Pertsev was arrested two years ago and is now embroiled in a high-stakes legal dispute against the government with its extensive resources pushing for his prosecution.
His financial situation has become dire and his funds are nearly exhausted. Supporters are calling for contributions to cover the estimated $750,000 to $1 million needed for ongoing legal expenses.
The crypto community has shown strong support for Pertsev and his co-developer Roman Storm. They are both facing charges of money laundering, sanctions violations, and operating an unlicensed money-transmitting business through Tornado Cash. This support has led to the creation of JusticeDAO, an advocacy group that is dedicated to raising funds for the developers' legal defenses.
By mid-June, the group raised more than 654 ETH, which is equivalent to about $2.3 million. This was done through a fundraiser called "Free Alexey & Roman" on the decentralized platform Juicebox. An additional 70 ETH was raised through the JusticeDAO page. Juicebox provides a publicly available spreadsheet that tracks the expenses of the fund. So far, $1.39 million was spent on legal fees between December of 2023 and May of 2024.
Despite these efforts, the financial demands of Pertsev’s legal battle are huge. He is still incarcerated after being denied bail, and his lawyers are preparing to appeal the charges of money laundering. To complicate things even more, Pertsev was denied his request to access a computer to prepare for his appeal, which only adds to the challenges he faces in mounting an effective defense.
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On May 14, the ‘s-Hertogenbosch Court of Appeal in the Netherlands found Pertsev guilty of money laundering, and sentenced him to five years and four months in prison. The court ruled that Pertsev laundered $1.2 billion worth of illicit assets through Tornado Cash.
This verdict happened after a previous ruling in November of 2023, where a Dutch court denied Pertsev's request for release under surveillance because of concerns that he posed a flight risk. During his trial in March, Pertsev argued that he should not be held responsible for the actions of people who used the Tornado Cash protocol for illegal purposes. However, the court rejected this argument and stated that Pertsev and his co-founders could have taken additional measures to prevent criminal misuse of the protocol.
