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The UK is becoming increasingly isolated as one of the few major global markets to continue to hold back from approving retail access to cryptocurrency exchange traded products.
Continental Europe has them, as do Australia, Brazil and Canada. The US has followed suit most recently with spot bitcoin ETFs, prompting Hong Kong to say it will also jump on board.
Yet the UK will not even let small investors buy those listed elsewhere even though Prime Minister Rishi Sunak has championed the UK as a crypto hub and has advocated for a regulatory framework that allows the sector to flourish in Britain.
The high-profile launch of 10 spot bitcoin ETFs on Wall Street earlier this month, some managed by household names such as BlackRock, Invesco and Fidelity, has heightened the UK’s divergence from most other financial hubs.
The UK’s stance was defined by a ruling in 2021, when its regulator, the Financial Conduct Authority, banned the sale of cryptocurrency-related “derivatives” — including exchange traded products — to UK retail investors.
The FCA’s ban appeared to be largely motivated by the emergence of leveraged products such as contracts for difference, with some operators offering as much as 100 times leverage on bitcoin, itself a highly volatile token. However, it also swept up unleveraged products such as plain vanilla ETPs and futures.
Some industry figures disagree with where the FCA has chosen to draw the line. It did not intervene, for example, in the trading by retail investors of digital tokens directly via crypto exchanges.
UK retail investors “can invest in crypto, just not through the regulated products”, said Bradley Duke, chief strategist of London-based ETC Group. Its $1bn Physical Bitcoin exchange traded commodity is listed on Euronext Amsterdam and Paris, Frankfurt’s Xetra exchange, the SIX Swiss Exchange and Chicago’s CBOE, but cannot be on the London stock exchange because of the retail ban. In aggregate, continental Europe boasts 120 crypto ETPs with €8.4bn of assets, according to TrackInsight.
“A UK retail investor can’t invest in a product like ours, a Mifid II [EU regulated] instrument, listed on a regulated exchange and sold through a regulated broker, who would screen you for applicability, depending on your investment objectives and profile,” Duke said.
“But they can go to a crypto exchange and buy bitcoin without going through any checks and balances, and to me that doesn’t really make sense.”
Andrew Prosser, head of investments at InvestEngine, a London-based investment platform whose 34,000 clients hold £320mn across almost 600 ETFs, said UK retail investors had two options if they want crypto exposure.
“They can either buy the coins themselves from digital exchanges. That comes with several problems: the need for digital wallets, private keys, the risk of theft. Or they can buy the shares of companies that track crypto, such as exchanges or miners,” Prosser said.
He said there were lots of requests on InvestEngine’s community forum for ETPs investing directly in crypto. “So there is demand for it,” he said.
Hector McNeil, co-founder and co-chief executive of London-based HANetf, which lists six ETC Group cryptocurrency vehicles on its ETF platform, said it was “getting a lot more calls from advisers and discretionary fund managers”, about crypto since this month’s flurry of US launches.
McNeil said that the recent launches in the US with managers such as BlackRock and Invesco getting involved, meant the asset class was now mainstream. “I think the FCA will have to reassess their position,” he said.
However, he did not believe the regulator should completely open the floodgates to all of the UK’s estimated 9mn self-directed investors.
“I don’t agree with general access,” he said, adding that with any more complex product there should be “some sort of gating”.
“If it’s somebody like me putting 3 per cent of their portfolio in, that should be fine. If it’s my mother wanting to put 100 per cent in because her friend down the social club told her she made loads of money, then I don’t think that’s right,” McNeil added.
But he also said crypto ETPs were “no more complex” than inverse or leveraged products, where “there is a procedure for brokers to give access” to investors who pass a suitability test and have an adequate balance sheet.
“You can’t tell me it’s more risky that trading 30 times leverage on a CFD [contract for difference] or spread bet,” McNeil added.
All the UK regulator had done, he said, is to “push people to dodgy crypto exchanges. I don’t think they have achieved what they wanted to achieve.”
Small investors “are going through unregulated or under-regulated exchanges where there is no broker involved and there is no one looking out for the suitability of their investments”, said Duke. “They have to hold the cryptocurrency themselves, which is risky.”
Despite these arguments, Prosser is not convinced the FCA, which declined to comment for this story, will buckle. When the regulator announced its ban in 2021 it also raised concerns about the “integrity” of the underlying crypto market, its volatility and its links to financial crime.
“Unless the case can be made that crypto has meaningfully changed in the last three years, it’s hard to see why the FCA would authorise them,” Prosser said, while the FCA’s Consumer Duty rules requiring companies to demonstrate fair value for clients, introduced last year, “places a lot more duty to assess risk on investment platforms”.
Jason Hollands, managing director of Bestinvest, a DIY investing platform, agreed.
“I am personally doubtful that the FCA will authorise bitcoin or other cryptocurrency ETFs to be made accessible to UK retail investors any time soon,” he said. “The FCA has repeatedly flagged concerns about the extreme volatility of cryptoassets, the high risk of losses and the difficulties retail investors face in valuing them.”