In the United Kingdom, the Financial Conduct Authority (FCA) is considering whether to end its prohibition on crypto exchange-traded products (ETPs). This is what the proposed amendment to UK regulation would do for retail investors. This decision marks a new direction for the UK’s approach to regulation of the rapidly developing cryptocurrency market. It brings the UK into line with other international competitive financial centres while ensuring that proper investor protection remains a top priority. The consultation, which was announced last week, demonstrates the government’s continued commitment to creating a competitive and attractive environment for the UK’s crypto industry.

Current Landscape of Crypto ETPs

There are now about 30 crypto ETPs listed on the London Stock Exchange (LSE). Currently, access to these products is limited to institutional investors. In fact, they have to preemptively pass an online test to demonstrate that they have the expertise and related knowledge necessary to manage the types of complex financial instruments. ETPs, an umbrella term encompassing funds or notes, are structured to mirror the performance of an underlying asset or benchmark.

Across Europe, the crypto ETP market is advanced, with about 130 crypto ETPs listed on major European exchanges. In November 2018, Europe’s first physically backed crypto ETP was born on the Swiss Stock Exchange. The story of Bitcoin futures ETFs’ inception This event was a remarkable step forward in the development of crypto investment vehicles. When 21Shares and WisdomTree launched their new products to market in late May 2024. This step substantially widens the playing field for European investors.

FCA's Consultation and Rationale

The FCA’s move to consult on lifting the ban is a clear signal that the regulator wants to strike a balance between encouraging innovation while maintaining investor protections.

"This consultation demonstrates our commitment to supporting the growth and competitiveness of the UK’s crypto industry. We want to rebalance our approach to risk and lifting the ban would allow people to make the choice on whether such a high-risk investment is right for them, given they could lose all their money." - David Geale, executive director of payments and digital finance at the FCA

This brief statement goes a long way toward explaining the regulator’s logic in seeking a policy shift. The FCA aims to empower investors with the freedom to choose while ensuring they are fully aware of the potential risks involved.

The first spot bitcoin ETFs in the United States were finally approved in January 2024. This landmark shift in regulatory policy drew considerable press coverage and featured some pretty compelling early trading victories. While Bitcoin ETFs technically already existed in the US, they were not ones that invested directly in the cryptocurrency itself.

Industry Perspective and Potential Impact

Industry experts and financial analysts alike have responded positively to the possibility of allowing crypto ETPs to retail investors. Others are very excited and optimistic, while others share their worries. Duncan Moir, president at 21Shares, believes the FCA's move aligns the UK with global financial hubs like the US and EU.

"The UK’s approach prioritizes sustainable market maturation over rapid growth," - Duncan Moir, president at 21Shares

This points to a cautious and prudent path forward for taking the use of crypto assets in the investment world more broadly.

Many observers urge restraint from investors, pointing to the rising risks and volatility of cryptocurrency markets. Monika Calay, director of manager research at Morningstar UK, warns against overexposing portfolios.

Morningstar’s position is that a portfolio allocation of 5% or less seems wise. Dovile Silenskyte, director of digital assets research at WisdomTree, echoes this worry. As practitioners navigate this complex and emerging field, she cautions investors against overallocating to this emerging asset class. Bitcoin’s past wild price swings make these fears understandable. Indeed, over the last ten years it’s been through several drawdowns over -40%, proving its nature as a high-risk investment.

Risks and Concerns

While increased access to crypto ETPs would bring clear benefits, substantial risks and concerns still exist. Bitcoin’s volatility and market manipulation risks require careful execution. As bitcoin holders know all too well, bitcoin has had multiple 40%+ drawdowns just in the past decade. This infrequent, extreme volatility is why it’s one of the most speculative investments on earth.

The FCA’s upcoming consultation will hopefully be a chance to tackle these risks head-on, finding appropriate safeguards to insulate retail investors from unnecessary harm. These protections could be additional disclosure requirements, improved investor education programs, or caps on the amounts investors can put in. The goal is to strike a balance between fostering innovation and ensuring that investors are equipped to make informed decisions.