The UK Financial Conduct Office has proposed lifting the four-year ban on retail investors purchasing exchange trading products (ETPs) related to cryptocurrency. However, there is already concern that the green light of this regulation could lead to speculative trading by new investors, and could legalize the heavy weights of highly volatile asset classes.
The purpose of this move is to increase the UK’s “cryptocurrency competitiveness” and better coordinate the market with the US. It also helps the UK catch up with Europe, where the first Bitcoin ETP was launched almost seven years ago.
“Granting UK retail access to Crypto ETPS could launch a significant and timely change in the regulatory environment,” said Dovile Silenskyte, director of Digital Assets Research at WisdomTree.
Following the debut of 21 shares and WisdomTree in late May 2024, around 30 crypto ETPs are currently listed on the London Stock Exchange, all limited to specialized investors who can prove they have the experience and knowledge to deal with “complex financial instruments.” This could change soon.
“We’re committed to providing a range of services to our customers,” said David Geale, executive director of FCA Payments and Digital Finance. “This consultation demonstrates our commitment to supporting the growth and competitiveness of the UK crypto industry. Reviving approaches to risk and lifting the ban will allow people to choose whether such risky investments are suitable for them.”
The proposal is now available for consultation. The FCA ban on retail access to cryptocurrency derivatives remains intact.
Do retail investors need to buy Crypto ETFs anyway?
“We maintain a neutral attitude towards broader retail access to cryptocurrencies in our portfolio,” says Monica Kalay, director of Manager Research at Morningstar UK.
“Our main concern is that retail investors may not maintain a long-term commitment to asset classes and instead engage in speculative trading while assigning disproportionate amounts of portfolios to crypto.
“We support investors who want to use small allocations for diversification purposes, but we are concerned about investors who motivate thinking like gambling and lottery tickets.
“We are deeply discouraged by tracking this type of short-term performance, which unfortunately is not uncommon in the world of retail investment.
“Bitcoin has experienced multiple drawdowns of over 40% over the past decade, placing it at the edge of the high risk of its investment spectrum.
“In Morningstar’s view, weighting a portfolio below 5% seems wise, and many investors may reasonably choose to avoid cryptocurrencies altogether.
“Given the extreme volatility and uncertainty surrounding this asset class, it requires a long-term horizon of around 10 years for investors.”
Wisdomtree’s Silenskyte says investors could be at risk of a dramatic overall progression into this new asset class.
“If these products are accessible to retail investors in the near future, it is important to understand how these products fit within a diversified portfolio and what constitutes the right allocation based on their risk profile.
“In our study, 56% of UK retail investors believe that over 10% are the right allocation to asset classes. However, the allocation of 1% within a diversified portfolio is sufficient to see meaningful benefits. As the market evolves, we need to help investors make informed and responsible decisions.”
Europe accepted crypto ETP before the UK
In November 2018, the first physically supported cryptocurrency ETP was launched in Europe on the Swiss Stock Exchange. This was a 21 share crypto basket ETP. The product has been the first to allow private and institutional investors the opportunity to invest in cryptocurrency without the need for additional infrastructure such as digital wallets. Since then, Sweden, Germany, France and the Netherlands have decided to accept the list.
In Europe, around 130 ETPs for cryptocurrencies currently listed on many European exchanges, including Euronext Paris, Euronext Austerdam, German XETRA and 6 Swiss Exchange.
Of course, the list of Euronext exchanges is for the single shares listed in those exchanges, so long as the brokers and trading platforms provide the ability to do so, allowing for more access points for investors residing in other European countries (such as Italy and Spain).
Why does the FCA allow Bitcoin ETP?
This development is subject to consultation and technical input, but few experts deny the role of politics in increasing investor access to cryptocurrency products.
The FCA has long been skeptical of cryptocurrency. For many years it has been a critic of such products and the underlying cryptocurrency, and has repeatedly warned potential investors about fraud and total capital losses.
“The FCA has made it clear that, in its view, CryptoAssets has no intrinsic value. 2018 Report on CryptoAsset Regulations.
So, what has changed? Concerns about the competitiveness and performance of the UK economy have placed emphasis on Whitehall’s political sentiment amid a wider push to reform the pension system. Provides more access to private credit for savers.
“This appears to be part of the progression from “the goal that is not competitive for the FCA” to “the goal that is secondary competitive for the FCA.” “The FCA responds to “growth is the basis of our strategy,” saying, “it will respond to the FCA.”
“Because other countries, including the EU, we allow crypto ETNs, there is a risk that the UK will be left behind in the region and will bring them within the scope of the Financial Promotion Regulations, so those participating will be subject to risk warnings, if not financial services compensation regimes.”
Nevertheless, concerns relate to consumer protection.
“The big question is whether this actually drives UK economic growth in a meaningful way or whether it will be beneficial for the companies that promote them,” Barrett says.
“As Mick McAterer pointed out, there is a difference between truly useful financial innovations and “the so-called financial innovations we see in finance.”
“The FCA has a very subtle line of balance between innovation and consumer protection.”
How Crypto investors can stay safe
“We welcome the FCA’s decision as Mifid 2 equipment, which is trading on regulated exchanges with Crypto ETP, is fully supported,” said Bradley Duke, Europe’s managing director and principal at Bitwise.
“Investors have decades of regulatory protection when trading ETPs, including protection against market manipulation. Until the ban is lifted, retail investors seeking crypto exposure will need to purchase in crypto exchanges that do not have the same protections as large, established stock exchanges,” he says.
Duncan Moir, president of 21Shares, said the move coincides with global financial hubs like the US and the EU, but “employs a more careful framework for retail participation.”
“The UK approach prioritizes sustainable market maturation over rapid growth,” he adds.
“Investors should recognize this as a justification milestone. This is not a guarantee of return, but rather weigh ETNs against volatility, regulatory uncertainty, and current stages of the crypto cycle.”
The FCA decision is to promote integration into mainstream finance by Crypto putting ETP under regulated exchange surveillance and implementing transparency in marketing and disclosure. “However, regulators balance innovation and risk mitigation, ban complex derivatives and emphasize retail education, reflecting the broader trend of recognizing cryptography as a high-risk asset class rather than a speculative toy,” Moir says.
Are US Crypto Spot ETFs and European Crypto ETP the same?
Bitcoin ETFs already existed in the US, but they did not invest directly in cryptocurrencies. Instead, they tried to replicate that performance through futures contracts (still banned for UK retail investors).
The approval of the first spot Bitcoin ETF in the US in January 2024 was met with media attention and proved to be a provider’s success in the first few days of the transaction. BlackRock, the world’s largest asset manager, has announced ISHARES BITCOIN TRUST go It collected over $2 billion inflows within just two weeks. This move also helps to raise the price of Bitcoin, After that, I violated $100,000 for the first time.
According to Moir of 21Shares, the UK ETP rollout is “not likely to replicate this momentum.”
This is due to two factors. First, the market scale: “The UK’s investor base and liquidity pool are small, with limited initial demand,” says Moir. Furthermore, the regulatory guardrails are different. “The FCA, in contrast to the SEC’s ETF framework, requires strict risk disclosure and excludes government-supported safeguards,” he adds.
The US Spot ETF and Crypto ETP are 100% physically supported by the underlying digital assets stored in cold storage very similarly by facility grade custodian work. That is, the issuer holds actual Bitcoin instead of derivatives, and each stock investor’s purchase represents the actual Bitcoin held by a regulated institution that normally goes through a strict process. These are equipment that have a structure that resembles the structure of physical gold exchange trade goods (such as).
The real difference is that in Europe ETFs are classified as mutual funds, and these must meet two basic criteria. The underlying assets must be financial instruments (securities), and mutual funds must invest in a variety of ways. Investments in a single asset are not permitted. These standards exist to protect investors in order to increase transparency in the structure of the product.
“As a result, cryptocurrencies do not fall into the European ETF category, because they are not legally recognized as financial products and therefore are not permitted to invest in a single asset.” In fact, the same principle applies to gold and other products.
What is ETN? Notes on the terms of the fund
The June 6th FCA statement specifically mentions Exchange-Traded Notes (ETNS) under the heading, “FCA to lift the ban on Crypto ETN.” But what does that mean?
The acronym ETPS is the term for umbrellas for products, constructed as funds or notes, intended to replicate the performance of an underlying asset or benchmark. It acts as an umbrella term (Exchange-Traded Commodities), such as ETFs (Exchange-Traded Funds), and as an ETN.
In the case of cryptocurrencies, the most widely used structure is ETN. Technically, they are financial obligation products, non-maturity financial obligation products issued by financial institutions seeking to match the market index or returns of a particular asset. ETNs may have a portfolio of assets given as collateral.
Cold Storage, Hot Wallet – Cryptocurrency terminology explained
London Stock ExchangeI said“Physically Backed” Bitcoin and Ethereum ETN are considered to have assets “completely or primarily held in cold storage.” This is a more secure way to store private cryptocurrency keys offline.
In this way, cryptocurrency users and investors will prevent theft by hackers who may control “hot wallets” via viruses, malware, ransomware, or other means. If such storage is not present, the publisher must obtain third-party audit reports and protect the regulated custodians.
Investors should also decide how to keep their crypto safe. You have the option to understand the complexity of using a hardware wallet or maintain a crypto balance in exchange for hot wallets. This is a crypto wallet that is always connected to the Internet or another connected device. According to Bitwise’s Duke, this is “not a great option.” “When retail investors trade Crypto ETPs, they must trade through a regulated broker.”
James Guard contributed to this article
