The Cryptic Wishing Tree

How Does a Money Transmitter Sell 1940 Act Mutual Funds to Retail Investors? Calling Them “Digital” Shouldn’t Be Enough. WisdomTree seems to disagree.

Disclaimer: I am not a lawyer. This is not financial advice or legal advice. Please don’t act on anything I write and seek your own professional advice. I am raising questions, not passing judgment — but I have to admit I cannot understand how any of this can be possible. But that’s why I am not a lawyer.

“Das singende, klingende Bäumchen” (The Singing, Ringing Tree) is a well-known East German fairy tale film from 1957, produced by DEFA (the state-owned film studio). It’s a dark, surrealist adaptation of a Brothers Grimm-style fairy tale, and was later broadcast in the UK by the BBC, gaining a bit of a cult status for its eerie atmosphere.

In recent years, events often remind me of it.

The enchanted tree only sings and rings under specific conditions and it remains silent until those are met. Everyone wants the tree and is willing to risk everything. But you cannot force it to sing other than by being who you need to be - but not for what you want for yourself - but for who you can be, for others so that you can be yourself.

This seems like another episode of wishing trees and wishful thinking.

A wishing tree (DEFA style 1957)

WisdomTree writes about WTGXX:

“Both the GENIUS Act and New York Department of Financial Services guidance specify high standards for reserve assets – standards that many alternatives don’t meet.

In this case, they are probably not wrong.

As a 1940 Act-registered money market fund, WTGXX can qualify as a reserve asset under these standards. We’ve heard what the market is looking for, and we are continuing to add functionality to meet these demands – peer-to-peer transferability, 24/7 interest accrual, and expanded primary market order windows. And we are actively working on the ability to trade WTGXX in real-time 24/7/365 against stablecoins, giving issuers the confidence to manage liquidity around the clock.”

That threw me. Because this statement begs a simple question.

How would this be possible?

I am not referring to the mystery how on earth they plan to perform 24/7 interest accrual when they underlying instrument don’t afford it. In that case, this becomes an arbitrary accounting gimmick but no longer represents actual financial risk because the daily trading price at NAV.

Under the Investment Company Act of 1940:

• Money market funds are regulated by Rule 2a-7, which imposes strict requirements on:

  • Liquidity

  • Valuation (NAV calculation)

  • Daily and weekly liquid assets

  • Trading and redemption windows

But mutual funds are not intraday-tradable—let alone 24/7/365. Their NAVs are calculated once per day.

• So all purchases and redemptions must occur at that NAV.

If WisdomTree can “sell” WTGXX at any price other than that day’s NAV, they’ve effectively found a way to trade alcohol during Prohibition — under the counter, not over it.

So if a product is advertised as a 1940 Act-registered money market fund yet would be tradable 24/7 at fluctuating prices, then:

• Either what’s being traded isn’t actually WTGXX,

• Or the setup would violate core securities law (Rule 22c-1, Rule 2a-7).

• Or the setup violates core securities law (Rule 22c-1, Rule 2a-7).

Website says:

“WisdomTree Prime Digital Funds Funds are exclusive to the WisdomTree Prime® mobile app.”

and they say these guys are in charge

“WisdomTree Digital Movement, Inc., 250 W 34th Street, 3rd Floor, New York, NY 10119

They have only money transmitter licenses and a virtual currency license in NY. That’s the Coinbase way - strictly no securities.

WisdomTree Funds are distributed by Foreside Fund Services, LLC.”

They are a broker-dealer registered with FINRA, acting as a statutory underwriter or distributor for 1940 Act funds.

Its job is not to advise or manage the fund, but file prospectuses, oversee marketing, and assist in sales infrastructure. But they cannot offer investment advice, manage portfolios, or engage in custody of fund assets.

But WisdomTree Digital Movement, Inc. can’t do that either. They provides wallet and app infrastructure, not securities advice or custody. The are not a registered investment adviser, not a broker-dealer. They cannot legally “sell” 1940 Act fund shares directly to retail investors or provide investment advice.

But then who is selling the securities? And what are they actually selling?

The WisdomTree Prime digital wallet and digital asset services are offered through WisdomTree Digital Movement, Inc. (“WDM”), a federally registered money services business, state-licensed money transmitter and financial technology company (NMLS ID: 2372500) or WisdomTree Digital Trust Company LLC (“WDTC”), in select U.S. jurisdictions and may be limited where prohibited by law.

WDTC is chartered as a limited purpose trust company by the New York State Department of Financial Services to engage in virtual currency business.

DTC and WDM are not banks and do not take deposits.

WisdomTree digital mutual funds (“Digital Funds”) are issued by WisdomTree Digital Trust (“WDT”) and managed by WisdomTree Digital Management, Inc. (“WTDM”), an SEC-registered investment adviser.

Digital Funds are distributed by Foreside Fund Services, LLC. WisdomTree Transfers, Inc. (“WT Transfers”), an SEC-registered transfer agent, serves as the transfer agent of the Digital Funds.

WDTC, WDM, WDT, WTDM and WT Transfers are affiliated entities and wholly owned subsidiaries of WisdomTree, Inc.

A registered TA:

• Updates ownership records based on authorized intermediaries (typically BDs or RIAs).

• Must follow SEC compliance, including anti-fraud and proper execution rules.

• Cannot accept trade execution instructions from unregulated entities in the securities context.

And it cannot do what their prospectus says:

“WisdomTree Transfers, Inc., the Fund’s transfer agent (“WisdomTree Transfers” or “Transfer Agent”), maintains the official record of share ownership through an integrated recordkeeping system with records in book-entry form and digital representations of Fund shares that are recorded – or tokenized – on the applicable blockchain. A transfer of the record on the blockchain can act as an information source for the Transfer Agent to register a transaction in its book-entry records.

The Transfer Agent utilizes a permissioned system that operates on top of public, permissionless blockchains. The permissioned system is established through a combination of policies, procedures, and technological controls which collectively seek to ensure that the blockchain operates as an integrated but supplementary recordkeeping mechanism under the oversight of the Transfer Agent.”

So permissionless blockchain becomes permissioned by some magic wishing tree and they use the permissoned permissionless chain which is now under their oversight to inform themselves about securities entitlements over a crypto assets which is actually not a crypto asset but they treat the crypto as security interest under UCC 8 opt voluntarily.

Is it possible that an actual lawyer could have come up with that? That would unfortunately not be impossible but if that’s what people learn at Harvard Law School (or whatever) then .. I don’t know anymore.

It seems like WisdomTree forgot they sell securities with the promise that the blockchain is under their oversight and yet they pretend its a crypto so that they can claim they are not liable for it. That is double grotesque.

“WTGXX has seen strong growth so far in 2025, growing from about $12 million to $486 million as of July 18, 2025. Contributing to this AUM growth has been adoption of WTGXX as a reserve asset for stablecoin issuers.”

There is half a yard in investment. Do they understand what they bought?

The Terms and Conditions disagree with prospectus in material ways:

“User agrees that the Wallet tracks entries relating to the User’s security entitlements of the Crypto Assets for purposes of Articles 1 and 8 of the UCC. In regard to such Crypto Assets, User and WisdomTree further agree that []”

It’s not a crypto asset under the law when you issue uncertified securities (fund shares) under the 40 Act which is what the statutory prospectus says and the prospectus and these terms contradict each other.

“Feedback” is voluntary and will be the exclusive property of WisdomTree, which WisdomTree may use for any purpose without obligation of any kind. To the extent User owns any rights in Feedback, User hereby assigns to WisdomTree all right, title and interest in and to Feedback. User agrees to perform all acts reasonably requested by WisdomTree to perfect and enforce such rights.”

If you provide any feedback, suggestions, or ideas (even casual ones), they:

1. Own it entirely — you give up all rights, even if it’s creative or commercially valuable.

2. Can use it however they like — without paying you, crediting you, or even notifying you.

3. Can demand your help — to legally enforce their ownership of your idea.

It is a risk to be their customer and let them know about an issue. They declare customer an execution agent to fix it.

“We may take the actions set forth above and will not be liable to you therefor.”

They disclaim all liability even if they freeze or alter your assets. Even if you suffer a loss — they’ve pre-cleared themselves. This is unilateral power over digital money — without a legal counterbalance.

#1: “WT Dollars do not convey any direct or indirect property interest…”

Yet in the next breath they describe the product as:

“An electronic document of title”
“WT TrustCo acts as bailee”
“You will look solely to the Substitute Bailee for delivery…”

They are using the language of legal ownership (e.g. bailee, title, delivery, Article 8 UCC) while denying the user has any ownership at all.

#2: “Performance of Services = all duties under UCC Article 8”

They deny you're a beneficiary of any property, while also claiming compliance with Article 8 — which exists to define and protect your entitlement. You cannot disclaim the user's rights and cite Article 8 as fulfilling them.

This agreement undermines its own claims and I don’t understand how a lawyer could draft something which cannot function as a lawful basis for issuing 1940 Act securities or title-backed digital assets. That is impossible, I guess.

“User hereby consents to electronic delivery of... required by the SEC, FINRA, or any other applicable regulator…”

They claim to deliver required disclosures under SEC and FINRA — but:

• FINRA governs broker-dealers.

• They explicitly say WisdomTree Securities is not acting as a broker-dealer in this agreement.

Since there is no broker-dealer involved in the transaction, FINRA rules aren’t applicable. Yet, they deal in securities.

“Only WT Digital Assets may be maintained, exchanged and transferred through the Services at this time.”

They just implied they are issuing and maintaining 1940 Act mutual fund shares, which are regulated securities, not digital assets. If these mutual funds are only transferable through this system, they have:

• Bypassed DTC (Depository Trust Company)

• Bypassed broker-dealers

• Used a money transmitter to sell securities.

This is not in line with securities regulations.

Official Record vs. Blockchain Record

“WisdomTree Transfers will maintain the official record... ownership will also be recorded on blockchain…”

They are trying to claim two records, and reconcile them daily — but:

• The book-entry system is the only legally recognized source of truth under SEC and UCC rules.

• The blockchain has no standing in law unless explicitly embedded in legal or regulatory frameworks (it isn’t).

• But they cannot operate a book-entry system as a TA.

Electronic Document of Title?

“WT Gold... represent an ‘electronic document of title’ under UCC Articles 1, 2,

You cannot simultaneously claim:

• “This is a mutual fund share regulated by the Investment Company Act of 1940” and

• “This is a document of title under Article 7 of the UCC.”

They are completely different instruments — one is a regulated investment security, the other is a title to physical goods like a warehouse receipt. You cannot say the same digital asset is both. Both the agreement always bundles everything into crypto but then also claims they are securities

“User is the bearer and holder…”

“User is the bearer and holder of the electronic document of title…”

If this were true:

• Then the user has constructive possession of gold, and

• WisdomTree is functioning like a warehouse custodian, not an investment adviser or fund operator.

But in the next paragraph, they contradict this by assigning control to the Stellar blockchain as the “exclusive” mechanism for transfer.

This mix of bearer logic for a document ?? and blockchain-controlled custody (purely intermediated) without a CSD but yet TA turning documents into book-entry securities cannot coexist in a coherent legal regime. What is that? I have no idea.

This agreement:

• Misrepresents regulatory responsibilities

• Confuses securities law and UCC logic

• Uses terminology (e.g. "digital fund shares", "document of title") without legal clarity

• Attempts to collapse investment, custody, and payments into one platform, while avoiding the distinct legal regimes each entails

Money Transmitter ≠ Securities Intermediary

A money transmitter like WisdomTree Digital Movement (WDM):

• Is not licensed to sell securities.

• Is not a BD, nor a clearing firm.

• Cannot provide suitability, KYC, or AML in the context of a securities sale the way a BD or RIA must.

• Is regulated under FinCEN and state-level payments law, not securities law.

If the TA acts on instructions from WDM, it is treating a money transmitter as a legal sales intermediary for registered securities and that is: Not permitted under the Investment Company Act or SEC transfer agent rules, I think.

They say:

“The blockchain record helps the TA reconcile…”

But that’s irrelevant unless:

• The originating instruction came from a legally authorized source, and

• The TA verified the legitimacy of that instruction through KYC and securities law compliance.

• And they say they control the blockchain in which case it would not offer additional safety.

Are they forgetting that their crypto are securities and they now go through an unregistered pipeline. The TA would be facilitating unregistered securities distribution. That would be ‘problematic’ under:

• The Securities Exchange Act of 1934 (especially Section 15),

• The Investment Company Act of 1940, and

• Potentially state laws as well.

The Transfer Agent cannot legally update shareholder records based on instructions from a money transmitter, no matter how sophisticated the tech stack is.

The WisdomTree Prime User Agreement confirms that:

• WisdomTree Digital Movement, Inc. (a money transmitter) is the entity entering into agreement with users and facilitating the sale of WT Digital Fund Shares, not a registered broker-dealer.

• WisdomTree Securities, although an SEC-registered broker-dealer, explicitly does not currently offer brokerage services and plays only an administrative role for the transfer agent (WisdomTree Transfers, Inc.).

• Users are not purchasing through a securities broker, but via a money transmitter and trust company acting as digital wallet providers.

This setup breaks the expected legal structure of securities sales in multiple ways:

1. Money transmitters are not legally authorized to offer or sell securities to the public unless they are also registered as broker-dealers or acting under an exemption (which is not the case here).

2. Transfer agents cannot independently perform sales activities — they are recordkeepers, not distributors.

3. Even if WisdomTree Digital Trust Company is a NYDFS-regulated trust, that charter does not supersede federal securities law. It gives them authority for virtual currency custody, not for primary distribution of 1940 Act fund shares.

4. The “user agreement” structure attempts to sidestep FINRA and SEC regulation of brokerage activity, potentially violating Section 15 of the Securities Exchange Act of 1934, which governs who may act as a broker.

In short, they appear to have created an unregistered, tech-intermediated fund distribution model that looks incompatible with existing securities laws — and that is before their product enhancements would be implemented that would create more inconsistencies.

Digital Mutual Fund Shares as Tokens

“The record of your share ownership is primarily recorded by the funds’ transfer agent in book-entry form. A secondary record of your ownership is represented… as a tokenized record.”

This is the most legally implausible part.They toggle between:

• “It’s crypto!” when trying to avoid SEC/FINRA broker-dealer obligations, using money transmitter or trust charter pathways.

• “It’s a regulated security!” when invoking the safety and credibility of the ’40 Act and BNY Mellon custody.

But that hybrid model is:

❌ Structurally contradictory.
❌ Legally irreconcilable.
❌ Systemically dangerous.

You cannot simultaneously tokenize mutual fund shares (a regulated security under the 1940 Act) and distribute them via a money transmitter not registered as a broker-dealer.

Misuse of Transfer Agent Model

They claim their Transfer Agent has a “blockchain-integrated book-entry system” — a fancy phrase that:

• Lacks legal precedent.

• Violates the functional definition of book-entry securities, which must operate under DTCC or SEC-compliant intermediaries.

• Is meaningless if not backed by actual transfer rights under securities law.

• They cannot create book entry settlement without being a clearing agency without setting up another DTC.

Regulatory Arbitrage wrapped in the language of:

• "Digital efficiency"

• "Blockchain transparency"

• "Consumer empowerment"

They’ve fictionalized a compliant infrastructure

They are creating a parallel ownership representation that:

• Has no legal standing under the 1940 Act and carry no legal ownership enforceability under current securities law.

• Violates the securities transfer and custody norms overseen by FINRA and the SEC.

• Appears to blur the line between securities and crypto while skirting broker-dealer regulations.

• Assumes that calling it tokenisation creates the ability to allow purchases through a money transmitter, not a broker-dealer;

• That these structures are “safe” because assets are custodied by BNY etc.

This system obscures legal accountability while leveraging the optics of regulation to create retail-facing products that ‘might’ not be as lawful as one would hope.

It breaks my heart because they started with noble ambitions but it seems they got confused by the whole blockchain thing. This was no small mistake.