The cryptocurrency exchange-traded products (ETPs) market in the United Kingdom is looking increasingly stagnant compared to other countries. While countries like continental Europe, Australia, Brazil, Canada, and the US have embraced crypto ETFs, the UK seems hesitant to catch on. This is ironic considering Prime Minister Rishi Sunak’s support for the UK as a crypto haven. Despite advocating for a regulatory framework that supports the crypto sector, the UK refuses to allow small investors to participate in crypto ETPs listed abroad.
This becomes even more evident with the introduction of 10 spot bitcoin ETFs on Wall Street, managed by major financial players like BlackRock, Invesco, and Fidelity. This not only highlights the UK’s deviation from global financial centers but also reveals its reluctance to adapt to the changing times.
The root of the UK’s resistance to crypto ETPs can be traced back to 2021 when the Financial Conduct Authority (FCA) banned the sale of cryptocurrency-related derivatives, including ETPs, to retail investors. The FCA’s concerns primarily focused on leveraged products like contracts for difference, which offer high leverage on bitcoin. However, this ban unintentionally affected unleveraged products such as plain vanilla ETPs and futures.
This decision has confused industry experts. Bradley Duke, chief strategist of London-based ETC Group, points out the paradox where UK retail investors can directly trade digital tokens on crypto exchanges without regulatory checks but are prohibited from investing in regulated products like the $1bn Physical Bitcoin exchange-traded commodity. In contrast, continental Europe has 120 crypto ETPs with €8.4bn in assets. Duke expresses frustration that UK investors are being denied access to regulated and more secure investment options while riskier direct crypto purchases remain unregulated.
The UK’s current position is a delicate balance between progress and protection. While it is commendable that the FCA is cautious due to the volatile nature of cryptocurrencies and their association with financial crime, it also feels like an overprotective parent preventing their teenager from attending prom for fear of catching a cold. Andrew Prosser, head of investments at InvestEngine, shares this sentiment, stating that UK investors are left with less secure options like buying coins from digital exchanges, which come with their own set of problems such as the need for digital wallets and the risk of theft.
Hector McNeil, co-founder of HANetf, offers a balanced view. He does not advocate for unrestricted access to crypto ETPs for the UK’s 9 million self-directed investors but calls for a more nuanced approach. McNeil suggests implementing suitability tests for investors, similar to trading inverse or leveraged products. The underlying message is clear: educate and regulate instead of outright banning.
However, Jason Hollands from Bestinvest doubts that the FCA’s stance will change anytime soon. The regulator’s concerns about the integrity and volatility of the underlying crypto market remain significant obstacles. While this protective approach safeguards investor interests, it also pushes UK investors towards riskier and unregulated avenues.
The UK’s isolated position in the world of crypto ETPs reflects a country torn between its ambition to be a crypto hub and its commitment to investor protection. It is a delicate balance to strike, and while the FCA’s caution is understandable, it raises questions about missed opportunities in a rapidly evolving global financial landscape. The UK may not be ready to fully embrace crypto ETPs yet, but as the world progresses, it will be interesting to see how long this stance can be maintained without the risk of being left behind.
