Should the FCA allow crypto ETP for retail trade?

(Image credit: Getty Images)

In January this year, cryptocurrencies took a further step into the mainstream when the US Securities and Exchange Commission (SEC) approved the first cryptocurrency exchange-traded products (ETPs). There are now around two dozen crypto ETPs available to US investors, and the biggest, iShares Bitcoin Trust, has around $20 billion of assets under management.

Crypto ETPs will make it easier to trade this volatile market, since ETPs can be bought and sold through a broker just like a regular share. However, these instruments are not yet available to UK retail traders, who cannot buy most US-listed ETPs as they don’t comply with UK regulations and are not tradeable through UK brokers that offer US stocks.

The Financial Conduct Authority (FCA) has approved cryptocurrency ETPs to list on the London Stock Exchange, but it is taking a very restrictive approach that limits access to professional investors. In May, the FCA approved ETPs from three providers – WisdomTree, 21Shares and Invesco. More are expected to follow. These funds aim to track the spot price of bitcoin and ether, and the cheapest have fees in the range of 0.2%-0.4%. 21Shares also offers ethereum “staking” ETPs, which means committing a proportion of your crypto (a minimum of 32 ether – around £64,000 at today’s prices) to validate transactions on the blockchain, create new blocks and maintain the network, giving holders an income from their assets.

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Yet the FCA is far more cautious on crypto than many other regulators. “The FCA continues to believe cETNs [cryptoasset-backed exchange traded notes] and crypto derivatives are ill-suited for retail consumers due to the harm they pose,” it said in March. “As a result, the ban on the sale of cETNs (and crypto derivatives) to retail consumers remains in place.” There is no sign of that stance changing, which does not appear very pragmatic. Many retail traders clearly want to hold crypto and it would surely be less risky to let them buy transparent products under UK regulations.

Since the FCA banned trading crypto via derivatives in March 2021, you can’t access it via spread-betting firms and contracts for difference. You can only buy crypto tokens directly, which means you are making an unregulated investment that is not overseen by the FCA, the Financial Services Compensation Scheme (FSCS) and the Financial Ombudsman Service (FOS).

First, you’ll need to choose a platform. There are many, but three of the better-known are Coinbase, Kraken and Binance. You’ll need to verify your identity to satisfy the platform’s know-your-customer (KYC) and anti-money-laundering (AML) measures. You’ll also need a bank that allows payments to crypto exchanges: many don’t and those that do may have limits on the value of transactions.

Once you’ve bought crypto, you need to decide where to store it. You can keep it at the exchange, but this exposes you to some risk of fraud or theft by hacking (you should only use the biggest and most credible exchanges, but even these have had problems with hacks and worse – the now-defunct FTX was once the third-largest in the world). The alternative is sending it to your own “wallet”: a “hot” wallet on your computer or smartphone, connected to the internet; or a “cold” wallet that is disconnected from the internet. Yet setting this up is more complicated – and if you lose or throw away the device your wallet is on, goodbye crypto.

The choices may get slightly better. In May, Interactive Brokers began letting UK clients hold cryptocurrencies via Paxos, a US-based crypto company. These are still not covered by the FCA, the FSCS and the FOS, but at least you would be going through a major global broker that is FCA-regulated. Yet crypto is in a needlessly messy situation. The FCA is right when it says: “Cryptoassets are high risk and largely unregulated. Those who invest should be prepared to lose all their money.” But it could reduce some risks by letting retail traders use regulated ETPs.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Ben studied modern languages at London University's Queen Mary College. After dabbling unhappily in local government finance for a while, he went to work for The Scotsman newspaper in Edinburgh. The launch of the paper's website, scotsman.com, in the early years of the dotcom craze, saw Ben move online to manage the Business and Motors channels before becoming deputy editor with responsibility for all aspects of online production for The Scotsman, Scotland on Sunday and the Edinburgh Evening News websites, along with the papers' Edinburgh Festivals website.

Ben joined MoneyWeek as website editor in 2008, just as the Great Financial Crisis was brewing. He has written extensively for the website and magazine, with a particular emphasis on alternative finance and fintech, including blockchain and bitcoin.

As an early adopter of bitcoin, Ben bought when the price was under $200, but went on to spend it all on foolish fripperies.