The UK is poised to reintroduce bitcoin exchange-traded notes (ETNs) to the market, a move that could have a more profound impact than anticipated. Following a four-year hiatus, crypto ETN products will become available to retail investors starting October 8, allowing them to gain exposure to cryptocurrencies without directly purchasing the tokens.
The Financial Conduct Authority (FCA) had previously banned these products in January 2021, citing concerns over extreme volatility, susceptibility to fraud, and valuation difficulties. However, this ban also left the UK trailing behind other countries in terms of crypto adoption. The US, for instance, has seen significant success with spot exchange-traded funds, with over $65 billion invested in bitcoin and ether ETFs since their inception in January last year.
European investors also have access to a range of exchange-traded products, while UK investors were forced to seek regulated exposure abroad, often using stocks like MicroStrategy as a proxy. According to Charlie Morris, founder of digital asset investment firm ByteTree, the return of bitcoin ETNs to London is being underestimated. 'London is the world's second-largest financial center, and many funds have touch points with London, whether it be custody, trading, legal, or settlement,' Morris noted.
The ban had previously locked out products complying with UCITS, the European framework for regulated mutual funds and ETFs, from accessing crypto if they wanted to have contact with the London-based financial system. Morris believes that this change will open up bitcoin to the global fund market, providing legal clarity and potentially leading to sustained demand for bitcoin in the years to come. The FCA's reversal signals a shift in the UK's approach to cryptocurrency, with the country seeking to reassert its relevance in the global market.
Industry figures, such as former Chancellor George Osborne, have warned that London risks falling behind if it does not embrace innovation. However, the complex structure of the country's investment-advice industry may slow the uptake of these products, according to Peter Lane, CEO of Jacobi Asset Management.
The UK adviser network is highly fragmented, and it will take time for firms to evaluate the implications of the crypto ETN ban being lifted and build the necessary due diligence processes before offering or recommending these products to clients.