United Kingdom Maintains Isolation from Crypto ETFs Amid Global Surge
United Kingdom restricts investors from accessing crypto ETPs, despite promoting itself as a global cryptocurrency hub.
The United Kingdom is currently positioned as one of the limited major global markets that have yet to approve retail access to cryptocurrency exchange-traded products (ETPs).
The country currently refrains from permitting small investors to purchase cryptocurrency products listed in other jurisdictions, despite Prime Minister Rishi Sunak’s promotion of the United Kingdom as a cryptocurrency hub and his support for establishing a regulatory framework that fosters the flourishing of the cryptocurrency sector within Great Britain.
UK’s position on this matter was established through a ruling in 2021, where its regulatory body, the Financial Conduct Authority (FCA), prohibited the sale of cryptocurrency-related “derivatives,” encompassing ETPs, to retail investors in the United Kingdom.
The FCA’s decision to impose the ban seemed primarily driven by the proliferation of leveraged products like contracts for difference, where certain operators provided up to 100 times leverage on the already highly volatile Bitcoin. However, the ban also encompassed unleveraged products, including ETPs and futures.
In contrast, Continental Europe, Australia, Brazil, and Canada have already embraced such products. The United States has recently joined this trend with the introduction of spot Bitcoin ETFs, leading Hong Kong to announce its intention to follow suit, emphasizing the United Kingdom’s deviation from the approach adopted by most other global financial centers.
FCA’s Regulatory Boundaries’ Effect
Some industry figures disagree with the FCA’s chosen boundaries as the regulatory body did not intervene in the trading activities of retail investors dealing directly with digital tokens through crypto exchanges.
According to Bradley Duke, chief strategist of London-based ETC Group, retail investors in the United Kingdom can still invest in cryptocurrencies, but not through regulated products.
The $1 billion Physical Bitcoin exchange-traded commodity the group offers is listed on various international exchanges, including Euronext Amsterdam and Paris, Frankfurt’s Xetra exchange, the SIX Swiss Exchange, and Chicago’s CBOE. However, it is restricted from being listed on the London Stock Exchange due to the existing retail ban. Moreover, across continental Europe, there are 120 cryptocurrency ETPs with assets amounting to €8.4 billion.
“A United Kingdom retail investor cannot invest in a product like ours, which is a Mifid II [EU regulated] instrument, listed on a regulated exchange, and sold through a regulated broker. These brokers typically conduct screening procedures to assess applicability based on your investment objectives and profile. However, they can visit a cryptocurrency exchange and purchase Bitcoin without undergoing any checks and balances, and in my view, that doesn’t truly align with logical reasoning,” said Bradley Duke.
Currently, retail investors from the United Kingdom have two alternatives for gaining exposure to cryptocurrencies: they can directly acquire cryptocurrencies from digital exchanges, facing challenges like the need for digital wallets, private keys, and the risk of theft; alternatively, they can choose to invest in shares of companies closely associated with cryptocurrencies, including exchanges or mining firms.
Rising Demand for ETPs Spurs Regulatory Change
The demand for ETPs is rising in the United Kingdom as investors actively seek options for directly investing in cryptocurrencies. The recent market entries in the United States, with firms such as BlackRock, Fidelity and Ark Invest among others, have propelled the spot Bitcoin ETF into a mainstream status. This shift may prompt the FCA to review and reconsider its current position.
However, the agency might also choose to maintain its existing stance. In 2021, when the regulator announced the ban, it cited concerns about the “integrity” of the underlying cryptocurrency market, its volatility, and its associations with financial crime. Without a compelling argument that cryptocurrency has undergone meaningful changes in the last three years, it is not easy to anticipate the FCA authorizing such products. Moreover, the agency has consistently expressed concerns about the extreme volatility of crypto assets, the high risk of losses, and the challenges that retail investors face in valuing them.
Until a significant shift occurs, the United Kingdom’s cautious stance on cryptocurrency products continues, maintaining regulatory barriers amid a global trend toward broader acceptance.
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