Within weeks, institutional investors could trade mainstream crypto-backed securities in London after the Financial Conduct Authority relaxed its blanket opposition to the asset class.
The London Stock Exchange, after the FCA capitulated, immediately announced that it would accept applications for the creation of tradeable securities, known as exchange traded notes, linked to bitcoin and Ethereum, the two leading cryptocurrency.
The bitcoin price soared up to 5 percent after the announcement. This was interpreted by many as a major change in tone, and it came amid speculations that the Treasury was exerting pressure on the authority, as they wanted London to become a leading cryptocurrency hub.
The FCA reiterates its position, that crypto is not suitable for retail customers. The FCA warned that those who invest in crypto should be “prepared to lose their entire investment”.
The stock exchange confirmed that it would accept applications to admit bitcoin and ethereum exchange-traded crypto notes in the second half of 2024. A precise launch date will be announced in due time.
The regulator’s U-turn comes just two months after the US Securities and Exchange Commission had opened up the doors for a number of exchange-traded bitcoin-linked investments, managed by major asset managers like BlackRock and Fidelity.
The regulator stated in a statement that it “would not object to requests by recognised investment exchanges for the creation of a UK listed market for crypto-asset-backed exchange traded notes”. These products will be available only to “professional investors, such as investment firms or credit institutions that are authorised or regulated by financial regulators and authorities”
Analysts say a perception gap has opened between the Treasury’s praise of the City’s role as a centre for crypto-related activities and the FCA’s apparent skepticism and concern about the potential harm to consumers and threat to financial stability.
Charles Randell (former chairman of the FCA) has criticised Treasury’s crypto regulations proposals. In September, he warned the regulator that it was under “significant political pressure” to accept [crypto] companies, including “some currently being investigated in the US”.
After the conviction for fraud of Sam Bankman Fried founder of the now-defunct FTX exchange and the fine imposed last year on Changpeng Zhao founder of Binance exchange due to money laundering rules, the sector has had a rocky ride in 2023. The demand for cryptocurrency has risen once more.
Charles Kerrigan is the head of cryptocurrency at CMS, a law firm. He said that the government needed to explain itself because the restrictions on UK investors’ access to US bitcoin exchange-traded fund didn’t fit with the aim to become a center for crypto assets.
“This is an immediate response to the dispute. The government, FCA and industry groups are in a delicate dance to be as open as possible without being too open. The FCA has the same negative comments as the SEC about investing in crypto.
It was unclear whether asset managers would take advantage of the launch of bitcoin exchange-traded note in London. One person pointed out that exchange-traded securities are debt securities and carry counterparty risk, as opposed to exchange-traded fund. Other jurisdictions, such as Switzerland, offer similar products.
BlackRock’s American bitcoin exchange traded fund has grown from $13 billion to £15 billion in just two months. The company said that it does not have any plans for a British bitcoin ETN.
The FCA stated that any exchange that wants to be a home to crypto exchange traded notes has to prove it has the appropriate safeguards in place to demonstrate that they will only be available to professional investors. The FCA said that institutional investors would be the only ones who are designated as “professional”. The regulator has different rules for so-called sophisticated individuals who can buy and sell more risky investments.
The FCA banned British firms from offering or selling crypto-derivatives and exchange traded notes that refer to certain types of crypto assets, to UK retail customers in 2020. This ban is still in effect.
According to Treasury Ministers, six million UK residents already hold crypto assets. However, these assets were acquired via offshore exchanges without the consumer protections that come with buying through a regulated exchange or using an authorised custodian.