After US bitcoin ETFs, the UK fights for retail to have the same freedom

The Financial Conduct Authority’s support for crypto products in the UK only went so far — and industry watchers are calling for retail customers to also have access to such offerings.

Allowing non-institutional investors to trade physically backed exchange traded notes (ETNs) would match similar strides made in the US and elsewhere, they noted.

The FCA updated its stance on crypto ETNs Monday, noting that it would not object to so-called recognized investment exchanges listing such offerings.

ETNs are debt securities that offer exposure to the underlying asset. Similar to bitcoin ETFs recently approved in the US, such products let investors trade securities that track their underlying crypto assets on-exchange during trading hours.

The FCA support for crypto ETNs was contingent on the products being available only to professional investors like investment firms and credit institutions, the regulator said in a Monday statement.

Given the change, the London Stock Exchange said Monday it would start accepting applications for physically backed bitcoin and ether ETNs in the second quarter.

While the FCA said it believes exchanges and professional investors can now better determine whether crypto ETNs meet their risk appetite, such products — and crypto derivatives — remain “ill-suited for retail consumers due to the harm they pose.”

An FCA spokesperson declined to comment beyond the statement.

Tim Bevan, CEO of crypto product issuer ETC Group, said it is “disappointing” that retail investors would still be left out from trading crypto ETNs on regulated markets. There is no such restriction for opening a direct crypto account, he added.

“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,” Bevan said in an email.

The FCA first banned the sale, marketing and distribution of crypto-focused derivatives and ETNs to retail consumers in January 2021.

But the crypto ecosystem has changed substantially since then from both a commercial and regulatory perspective, according to Laura Navaratnam, UK policy lead at the Crypto Council for Innovation (CCI).

The Securities and Exchange Commission approved spot bitcoin ETFs in the US in January. Jacobi Asset Management launched the first bitcoin ETF in Europe on the Euronext Amsterdam exchange last August — though crypto ETNs have existed around the continent for years.

“Given these changes, it makes sense that the ban [for] retail clients be reconsidered by the FCA,” Navaratnam told Blockworks. “CCI would welcome additional work on this as a priority given the timelines for the future broader regulatory regime for crypto assets are unknown.”

Mandy Chiu, head of financial product development at crypto asset manager 21.co, noted that the FCA’s cautious “phased approach” is likely a step toward retail access once the regulator can assess the impact within “a more informed participant base.”

“We are very pleased to see the decision to accept crypto ETPs applications, but we believe retail investors are better off investing in crypto ETPs versus buying spot directly, as ETPs are regulated products subject to strict regulatory oversight by financial authorities,” she told Blockworks. “ETP investors also benefit from insurance, institutional-grade crypto custody and ease of trading via their existing brokerage accounts.”

The FCA is likely waiting to get a clearer picture of how the SEC’s approval of bitcoin ETFs plays out, the 21.co executive added. So far, the 10-fund segment has seen more than $10 billion of net inflows — even with the largest fund in the category, the Grayscale Bitcoin Trust ETF (GBTC), enduring net outflows of about $11 billion.

“The success of bitcoin ETFs in the US certainly have created pressure for the FCA to reconsider, as the UK has become an outlier among its peers,” Chiu said. “However, the FCA has taken a relatively progressive approach to allow for [ether] from the get-go, which is very encouraging to see.”

The SEC, which has not yet approved ether ETFs, is expected to rule on ETH products proposed by various US issuers in May.

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