Crypto ETN providers head for UK but urge rethink on retail ban

A rash of cryptocurrency exchange traded products are likely to be listed in London after regulators softened their hardline opposition to allowing domestic access to funds with cryptocurrency exposure.

However, industry figures have criticised the UK’s Financial Conduct Authority for limiting their availability to “professional investors” and continuing with its ban on retail investors buying crypto ETPs.

The FCA said last week it would “not object” to a request from bourses such as the London Stock Exchange and Cboe UK to list unleveraged crypto-backed exchange traded notes linked to bitcoin or ether, the two most popular cryptocurrencies. But it added that the vehicles should only be available to institutions such as investment firms, credit institutions, pensions funds and insurance companies.

Its stance is in contrast to the growing number of other countries that have opened the door to individual investors.

Nonetheless, the end of the FCA’s blanket ban on crypto ETPs brings it a fraction more in line with continental Europe, Australia, Brazil, Canada and the US, which already boast crypto ETPs.

US-domiciled “spot” bitcoin exchange traded funds have garnered $31bn between them since their rollout in January, helping send the price of the digital token spiralling to an all-time high of $73,000 before losing some ground.

Despite the UK’s cautious approach, a number of pre-existing crypto players are likely to come on board.

“The LSE is such an important market for us we definitely will list products when possible and preparation is under way. We hope the retail ban will be lifted soon after,” said Bradley Duke, chief strategist of ETC Group, which runs Europe’s largest crypto fund, the $1.6bn ETC Group Physical Bitcoin.

Townsend Lansing, head of product at CoinShares, which runs the next four largest, said: “We look forward to engaging with the LSE about the new listing opportunities and to better understand their requirements and how our products might fit.”

WisdomTree, which has more than $800mn across its range of eight European crypto ETPs, said the LSE would “provide a more convenient access point for UK-based professional investors seeking exposure to crypto ETPs than overseas exchanges”.

“We are currently engaging with the FCA and LSE to explore the opportunity more thoroughly,” it added.

Menno Martens, crypto product manager at VanEck, said the FCA’s announcement was a “very positive development” and that it was “looking into potentially listing our crypto ETNs in the UK”.

The UK’s stance is unlikely, though, to attract every issuer active in the European crypto ETP market — which boasts 100 products with combined assets of $14.2bn, according to ETFbook data.

One house told the FT: “Obviously, it’s not available to UK [retail] investors currently. Should the regulation change and there is client demand, we would consider something for clients in the UK.”

Mandy Chiu, head of financial product development at 21Shares, another major player, said although the FCA’s decision was “encouraging” it would continue to “monitor” the situation and did not have plans for any UK-listed products at present.  

The UK regulator said last week it “continued to believe that crypto ETNs and crypto derivatives are ill-suited for retail consumers due to the harm they pose”. Given that crypto assets are “high risk and largely unregulated, those who invest should be prepared to lose all their money”, it added.

Yet UK retail investors are free to buy cryptocurrencies directly on exchanges, which come with the additional need for digital wallets and private keys, as well as the risk of theft.

“I find it ridiculous,” said Pawel Janus, head of analytics at ETFbook. “Retail investors can buy crypto on exchange. You have zillions of different platforms and they are all approved.

“On the other hand regulators have a problem with giving a green light to the ETP, which generally is a better structure. You know it’s fairly priced otherwise there would be an arbitrage.”

CoinShares’ Lansing said it was “disappointing to see the FCA remain out of step in terms of retail investors, who, in the rest of Europe and the United States can use regulated listed products to access digital assets but who, if UK resident, are required to use uncollateralised and unregistered exchanges to invest in this asset class”.

Hector McNeil, co-founder and co-chief executive of London-based HANetf, which lists six ETC Group crypto vehicles on its ETF white-label platform, said the FCA’s announcement was “a good step forward. It means the UK is catching up with other markets in Europe now.”

However, McNeil said that as the door was only being opened to professionals, “the bar is still too high”. He argued that access should be along the lines of the UK’s regime for complex instruments such as leveraged ETFs, whereby brokers act as gatekeepers, only allowing through “retail clients who understand and can afford the risks of the asset class”.

Tim Bevan, chief executive of ETC Group, referenced Prime Minister Rishi Sunak’s push to make the UK a hub for digital assets.

“If UK regulations permitted retail investors to invest in crypto ETPs via regulated markets this would bring the UK in line with much of Europe and allow those retail investors to take advantage of the built-in security that established exchanges provide,” he said. “It would also help advance the claim of the UK to be a global leader in fintech.”