UK FCA Greenlights Crypto Investment Products with Conditions

The Financial Conduct Authority (FCA) in the UK has announced that it will allow professional investors to trade crypto exchange-traded notes (ETNs) created by recognized investment exchanges (RIEs). Retail investors are still prohibited from participating. ETNs are the favored exchange-traded product (ETP) in the UK and European Union due to regulatory conditions that prohibit the offering of an exchange-traded fund (ETF) for a single asset like Bitcoin or Ether. While professionals in the UK may soon have easier access to crypto investment products, the exclusion of retail investors highlights the hesitancy to embrace crypto assets among this group.

Crypto industry figures have welcomed the FCA’s decision to allow recognized investment exchanges to list crypto ETNs, as it fosters the integration of cryptocurrency-related products into a regulated environment. Some believe that more needs to be done to make the market more accessible and to enfranchise more companies into UK markets. The UK has expressed ambitions of becoming a global hub for the crypto industry, and in order to achieve this, the FCA needs to broaden participation quickly.

The stance of the FCA towards the crypto industry has been cautious, with the establishment of restrictions on crypto derivatives for retail investors in October 2020. The FCA cited reasons such as the lack of reliable valuation basis, prevalence of market abuse and financial crime, extreme price volatility, inadequate understanding by retail consumers, and lack of legitimate investment need. Despite the upward price trajectory of Bitcoin and Ether since then, the FCA has maintained its ban on offering crypto ETNs to retail investors.

The FCA’s cautious approach may be influenced by concerns that allowing certain crypto-referenced products could give the impression that the underlying crypto assets themselves are regulated. Critics argue that this ban may drive investors towards unregulated exchanges and increase their vulnerability. They advocate for comprehensive regulations that allow safe exposure to crypto assets while safeguarding investors. There is a need for further collaboration between the public and private sectors, as well as with domestic and global policymakers, to create an effective regulatory framework for the crypto industry in the UK.

In the United States, the approval of spot Bitcoin ETFs faced significant industry and political pressure. In comparison, the path to a UK ETN seems relatively smoother, although there is still work to be done to ensure greater accessibility. It remains to be seen if the FCA’s position on crypto ETNs for retail investors will change in the future, but there is hope among industry insiders for meaningful and swift change.

The FCA’s decision to allow professional investors to trade crypto ETNs is seen as a step in the right direction for the UK regulatory environment for crypto. More needs to be done to broaden participation, ensure investor protection, and establish a comprehensive regulatory framework for the industry to achieve its ambitions of becoming a global hub.