Market players slam UK watchdog’s bitcoin ETN ban

ETC Group, an issuer of digital asset backed securities listed on regulated stock exchanges, says the FCA's decision to ban the sale of regulated exchange-traded notes (ETNs) linked to cryptoassets to retail customers could result in more investors trading on unregulated markets without the rigorous market abuse protections of a regulated product on a major European exchange. 

The FCA's decision removes the 'safety net' for investors - ETC Group

The decision means more investors will have to manage their own Bitcoin storage, which could increase the risk of losing keys and becoming a victim of cybercrime, for example, whereas with BTCetc, ETC Group’s Bitcoin exchange-traded product, the security is kept safely in the investors brokerage account while managing the underlying Bitcoin is undertaken with high security levels and with insurance against theft.

‘Cryptoassets like Bitcoin are becoming increasingly popular with investors,’ said Bradley Duke (pictured), CEO of ETC Group said. ‘They provide many benefits to investors from diversification to strong potential for long-term growth. The FCA’s decision makes it harder for retail investors to access this, and those that do may be achieving this through channels and products that are riskier and provide less protection that those being banned.’

ETC Group also noted that the FCA’s decision removes the ‘safety-net’ for retail investors that is provided by the suitability guidance of investment advisors when assessing the risk appetite and profile of their clients for these regulated products.

‘Investors who want to gain access to this asset class are now left with less secure ways to invest in Bitcoin,’ said Duke.

Damning analysis

The UK financial regulator’s Bitcoin crackdown underscores its misguided approach to cryptocurrencies – which are the future of money – according to the CEO of one of the world’s largest independent financial advisory and fintech organisations.

According to Nigel Green (rigth), chief executive and founder of deVere Group, the FCA final rules banning the sale of derivatives and ETNs that reference certain types of cryptoassets, such as Bitcoin, ether and ripple (XRP) to retail consumers ‘underscores the regulator’s rather misguided approach to cryptocurrencies’.

‘Whilst the FCA is not stopping people buying bitcoin or other cryptocurrencies directly, it is banning the sale of products based on their prices,’ said Green. ‘The regulator does express some valid concerns in its new rules, which we welcome and support.’

Green is of the view that, rather than banning, the FCA should be regulating the ‘booming and unstoppable’ sector.

‘This market, thanks to its exponential growth, needs a robust and enforceable regulatory framework. It needs scrutiny,’ said Green. ‘The staggering pace of the digitalisation of economies and every aspect of our lives highlights that there will be a growing demand for digital, global, borderless money.’

Most major financial institutions globally already have or are preparing to establish crypto desks as a result of more and more retail and institutional investors piling into the market, as well as tech giants, like Facebook, getting involved.

‘Already digital currency is almost universally regarded as the future of money – and we need a joined-up approach to tackling those who undermine it,’ said Green. ‘The tide is not going back. Traditional, fiat, paper currencies are not the future.

‘Therefore, regulation – not a ban - is necessary. This will provide further protection for the growing number of people using cryptocurrencies, it will help stamp out criminal activity, the less potential risk there will be for the disruption of global financial stability, and the more opportunities there will be for economic growth and activity in those countries which introduce it.’

Losing ground

Global Digital Finance (GDF), an industry membership body that promotes the adoption of best practices for cryptoassets and digital finance technologies, claims that the FCA ban to retail customers is a huge setback for the UK in maintaining its dominant position as a global fintech hub. 

According to the DGF, the FCA move has left many in the cryptoasset sector questioning the regulator’s willingness to collaborate with them and listen to the views of key market participants.

DGF questions the FCA’s decision to ban these products when no similar steps have been taken in Europe, the US or Asia.

It is critical of the regulator for ignoring its own research findings and the overwhelming majority of responses to its consultation on the cryptoasset investment sector - a survey conducted by the FCA, published this year noted that ‘the majority of cryptoasset owners are generally knowledgeable about the product, are aware of the lack of regulatory protection afforded and understand the risk of price volatility’.

‘In stark contrast to other global regulatory trends with cryptoassets, the FCA’s ban puts the UK out on its own in terms of taking a prohibitive stance,’ said Lawrence Wintermeyer, (right) executive co-chair of GDF. ‘This is an unfortunate move following the UK Government’s snub to fintech companies by initially excluding them from its Coronavirus Business Interruption Loans Scheme [CBILS administration scheme]. This surprising exclusion damaged the Government’s credibility as a champion of fintech following more than a decade of promoting fintech competition as an antidote to the concentration risk of incumbent UK banks following the financial crisis.

‘The FCA’s decision to ban the sale of certain investment products linked to cryptocurrencies is yet another setback for the UK in trying to strengthen its position as a leading market for fintech and the digital asset markets.’

GDF pointed out that recently Germany’s regulator BaFin approved ETC Group's BTCetc Bitcoin ETP an ETF that is 100% physically backed by Bitcoin, and for every unit of BTCE, there is Bitcoin stored in regulated, institutional-grade custody - BTCetc was the first cryptocurrency ETP admitted to Xetra to be cleared centrally.

According to the GDF, other regulators, notably the US CFTC, have been safely overseeing regulated crypto derivatives markets for nearly three years with products that offer a reliable basis for valuation.