The ending of the ban on the sale of crypto exchange-traded products (ETPs) to UK retail investors felt like an inevitability after the main City regulator said in June that it would consult on removing marketing and distributions restrictions that were introduced in early 2021.
Retail investors will from October 8 be permitted to buy crypto exchange-traded notes (ETNs) listed on the London Stock Exchange and other regulated investment exchanges which were previously only available to institutional players.
Crypto product providers are delighted with the rule change which was described as the “first step in a seismic shift in UK financial markets” by Russell Barlow, chief executive of 21Shares, one of the pioneers of crypto ETPs in Europe.
This represents a major policy shift by the Financial Conduct Authority (FCA) which described crypto ETNs and derivatives as “ill-suited for retail customers due to the harm they pose” as recently as March 2024.
Since then, the FCA has adopted a different stance on financial risks after coming under pressure from the government to reduce the regulatory burden on companies in order to stimulate the UK’s disappointing post-Brexit economic growth rate.
The regulator has also faced heavy lobbying with 80 responses to the consultation process. It is a safe bet that the majority of the responses will have been from product providers and trade associations pressing for the change.
The sole consumer group which responded, the Financial Services Consumer Panel, opposed the removal of the ban on the grounds that concerns such as high crypto volatility, valuation challenges, consumer understanding and the risk of financial crime have not been sufficiently addressed.
Chris Pond, the chair of the Financial Services Consumer Panel, also expressed concern about the FCA’s warning that retail investors should “do their own research” before buying a crypto ETN.
“In practice, consumers are likely to rely on unregulated and potentially unreliable sources — such as social media platforms, online forums, and influencer content — when attempting to assess complex and high-risk products like cryptoasset ETNs. These channels often lack accuracy, objectivity, or regulatory oversight, increasing the likelihood of consumers being misled,” said Pond.
The FCA now argues that crypto has become “better understood” by the public and so consumers should be provided with more choice while “ensuring that there are protections in place.”
This debateable claim of improvements in understanding cryptocurrencies is based on the findings of an online survey of 2,199 interviews carried out on behalf of the FCA by YouGov and designed to be a representative sample of the UK’s adult population.
The survey helped the FCA to estimate that around 7.7m UK adults owned crypto assets in August 2024, up from just 2.2m in 2021. But rising crypto ownership does not automatically translate into a better understanding of the risks of investing in digital assets, such as bitcoin and ethereum which are both trading at all-time price highs.
An explicit indication of the poor understanding of the risks is the finding that one-in-five cryptoasset users still believe they will receive financial compensation if they experience a loss in their crypto holdings, according to the YouGov survey. This is in spite of repeated warnings by the FCA that retail investors in crypto ETNs will not be protected from the risk of losing their money as these investments will not be covered by the Financial Services Compensation Scheme (FSCS).
The FCA must be well aware that large numbers of retail investors, 26% in the YouGov survey, regard cryptoassets as a gamble which could make or lose money with a significant proportion, 14%, borrowing money on their credits cards to fund these wagers. Even so, the FCA believes that approval for crypto ETNs does not represent a material increase in risks for retail investors given that they can already buy bitcoin and other digital currencies on unregulated exchanges.
The regulator’s view is that existing restrictions on marketing – sales pitches – will ensure retail investors understand the risks.
This seems optimistic.
Marketing materials by crypto ETN providers promise access to “physical” bitcoin which is a digital asset with no physical presence, which may be a confusing proposition for private investors.
Similarly, will this audience understand that an ETN is a debt instrument with at least some counterparty risk exposure to the issuer?
Regulatory approval for cryptocurrency ETNs will undoubtedly encourage wider adoption among retail investors.
But will ordinary investors realise that regulatory approval for crypto ETNs does not erase the fact that the underlying cryptoasset markets remain largely unregulated, prone to wild price volatility and exposed to the risk of financial crimes, as the FCA itself has conceded?
The clear risk is that the FCA’s blessing for crypto ETNs encourage more naïve investors to jump into a highly volatile sector which is already displaying warning signs of entering bubble territory.
Donald Trump’s decision this week to allow millions of US investors to use savings in their 401k pension savings accounts to buy cryptocurrencies will further inflate the price bubble.
The proliferation of so-called bitcoin treasury companies with stock market listings which raise equity or debt simply to buy digital tokens is another worrying sign. A growing number of listed companies that are not directly involved in crypto are also adding Bitcoin to their balance sheet to help boost their share prices. The danger is that any fall in the price of Bitcoin will be magnified in their share prices, creating another risk for stock markets which are already trading at record levels in the US, UK and Europe.
It is hard to avoid the conclusion that the FCA has surrendered to the enticing siren calls of the crypto industry, which will now push ahead with demands for even more risky, leveraged products to be approved for sale to retail investors.
