In a bid to make the UK’s crypto industry more competitive with markets like the US, the Financial Conduct Authority (FCA) is considering lifting the ban on crypto exchange-traded notes. The lifting of the ban would enable retail investors to trade crypto ETNs on FCA-recognized exchanges. Crypto asset derivatives would still be banned under the proposed changes, however.
Crypto Investment
Different cryptocurrencies have different primary purposes. Bitcoin was established as a digital transfer of value, and Ether as a means of paying for smart contracts and decentralized apps. However, whatever their original purpose, cryptos have become most widely used as investment vehicles. Established coins like Bitcoin are popular for their potential for long-term gains, while some of the best crypto presales to buy right now can offer exponential gains to speculators who do their research and choose the right currencies. Crypto expert Tony Frank points out there’s no guarantee of success from presales, but they do offer significant potential.
Legacy Regulations
However, the high volatility of cryptocurrencies, as well as the prevalence of scams and frauds during the early days of the market’s evolution, led to financial authorities like the FCA banning the trading and purchase of certain crypto products. While some countries, like the US, and some European markets have evolved, enabling companies to offer ETFs to investors, other regulatory bodies have stalled. Crypto companies are also highly regulated in most countries, where they need special business licenses to operate.
FCA Consultation
The FCA’s announcement that it is opening a consultation to discuss proposals to allow Exchange Traded Notes represents the most significant move forward in the UK market. Not only could it open up crypto investment to more people, but it could also benefit the crypto market as a whole by enhancing visibility, and, at least according to the FCA, it shows the group’s commitment to “supporting the growth and competitiveness of the UK’s crypto industry.”
What Are ETNs?
Exchange Traded Notes track specific indexes. In this case, a Bitcoin ETN would track Bitcoin, while a general crypto ETN would track the market as a whole. The fund doesn’t own any of the assets, but if the tracked market rises or falls, so too does the value of its notes, and this enables investors to be able to profit from cryptocurrency without having to directly buy any of the coins themselves.
The FCA said: “We want to rebalance our approach to risk and lifting the ban would allow people to choose whether such a high-risk investment is right for them, given they could lose all their money.”
How They Differ From ETFs
Exchange-traded funds work on a similar premise but are better known than ETNs and do have one distinct difference. Funds track the same indexes, but they purchase the stocks or, in this case, coins that they are tracking. For example, if the fund was linked to the top 50 cryptocurrencies by market cap, it would buy and hold those funds. Theoretically, this means that investors always have the assets in place should the asset managers themselves run into financial difficulty.
What Are Crypto Asset Derivatives?
While announcing the consultation, the FCA said that a ban on crypto asset derivatives will remain in place. Derivatives are a form of investment vehicle that enables investors to be able to invest in the future price movement of particular assets, without the need to purchase the assets. For example, futures and options are well-known forms of derivatives available in other indexes and markets.
Why They Will Still Be Banned
The FCA banned the sale of crypto derivatives in 2020, giving several reasons for the move. In particular, they pointed to the lack of underlying assets, meaning that the derivatives have no basis for accurate evaluation. They also pointed to the extreme volatility of the market – derivatives can greatly magnify performance, which, against the high volatility of coins like Bitcoin, means that investors stand to lose substantial amounts of money.
At the time of the ban, the FCA wrote: “Retain consumers might suffer harm from sudden and unexpected losses if they invest in these products.” The group’s announcement suggests they haven’t changed their minds in this regard. At least, not yet.
Catching Up With The US
Critics of the UK’s regulatory framework, or lack thereof, have previously pointed to the fact that the UK is being left behind, in particular by the US.
Following a lengthy legal battle, the Securities and Exchange Commission (SEC) approved the first 11 Bitcoin spot ETFs in January 2024. They became popular with commercial investors because they enabled them to invest in Bitcoin price movement without having to deal with the acquisition and holding of the digital assets, and the risks and administration associated with doing so.
April’s Crypto Regulation Drafts
In response to criticism that the UK was being left behind, and arguably to help further boost the UK financial economy, the FCA announced in April that it was updating crypto regulations. A proposed new framework would see crypto companies come under the same scrutiny and the same oversight as traditional financial companies. Finance Minister Rachel Reeves said the UK would cooperate closely with the US on how best to deal with cryptocurrencies and indicated that the country would be more closely aligned with the approach taken by the US rather than the one adopted by the EU.
While announcing proposed changes, she said: “Under the new rules, crypto exchanges, dealers and agents will be brought into the regulatory perimeter – cracking down on bad actors while supporting legitimate innovation.”