UK Says “Yes” to Crypto, But Keeps You Out — What’s Really Going On?

The United Kingdom has finally lifted its ban on the retail access of crypto-linked investment products, which was imposed almost four years ago. However, in a turn of events that has confounded and puzzled investors, they have yet to be purchased by everyday traders. The Financial Conduct Authority (FCA) possibly left the door open, and currently, the key appears not to be found.

A Much-Improved Policy Reversal

The ruling by the FCA is a historic milestone as far as the handling of digital assets in Britain is concerned. Over the years, regulators have been very tough in their view that crypto products are not fit to be held by retail investors as they were volatile, not transparent, and full of scams. This has changed this month, when the FCA overturned its cryptocurrency exchange-traded notes (ETN) prohibition, which covered products based on Bitcoin and Ethereum.

The relocation was hoped to democratize crypto access and enable UK investors to get exposure through regulated mechanisms, as American investors can trade Bitcoin ETFs. The CETNs, as they are called, track the value of digital assets without holders actually having to possess them. This framework was set up to provide exposure in a tier of regulatory protection and institutional custody.

However, as the rulebook has been rewritten, the marketplace has remained behind.

The Post-Ban Paradox

So, what’s the holdup? Most UK trading platforms and brokerages have not offered these products to their retail customers despite the announcement by the FCA. This is the case because of the difference between enforcement and regulation.

The banks are still rushing to comply, test and report on these high-risk products. Before the provision of crypto ETNs, platforms have to perform their appropriateness assessments on customers, as well as upgrade their risk disclosure systems and obtain independent regulatory approvals for each of the listed products.

In a few words, the law is currently open to retail involvement; however, the financial system plumbing is still not ready.

A Cautious Rollout

Industry followers believe that regulators are still apprehensive about an influx of retail funds being dumped into crypto overnight. Rather, they seem to be promoting a gradual implementation process – a process that entails the establishment of consumer protection mechanisms.

In accordance with the current FCA regulations, the investment firms should prove that retail investors are aware of the risks of crypto ETNs. This will involve the realisation that they are not direct crypto assets, that the volatility is high and that capital losses may be absolute.

Brokerages are also awaiting clarification on the eligibility of ISAs and pensions. In the meantime, crypto ETNs may be placed in Stocks and Shares ISAs and self-invested personal pension (SIPPs).

 However, this rule will change in 2016, when the Treasury intends to transfer such assets to the category of the so-called Innovative Finance ISA (IFISA) – a more limited and smaller vehicle. The impending shift has generated confusion with the providers, as they hesitate to make a heavy investment in integrating only to re-integrate a few months down the road.

The Bigger Picture

The partial reopening of the UK occurs when the attitude towards crypto is changing in the global context. Spot Bitcoin ETFs and other products of the same kind are already adopted in the United States and a number of European markets, generating billions of dollars in institutional inflows.

To Britain, the retail ban was more about competitiveness than regulation. The financial city of London, with a long-standing tradition of being agile and innovative, risked being left behind by a fast-changing global market. The government, by lifting the restrictions, hopes to convey the message that the UK is prepared to embrace responsible digital finance and not just spectate on the sidelines.

Nevertheless, the message of the FCA is understandable: the passion should not work faster than the judgment. One regulatory supporter has remarked recently that we desire innovation, but not at the expense of investor safety. Such an attitude represents a residual uncertainty at Whitehall – a feeling that crypto is an asset that can bring revolution and destruction.

What It Means as a Retail Investor

To the average investor in the UK, it is a matter of both advancement and waiting. The ban is possibly dead, but it may take weeks (or months) before it becomes a practical solution. The financial websites are required to finish the compliance upgrades, risk alerts, and seek FCA approvals prior to the launch of crypto ETNs.

As soon as these products are accessible, anyone will be able to get exposure to Bitcoin, Ethereum, and other digital assets via regulated exchanges – without operating personal keys and without using unregulated crypto exchanges. However, this does not make them safe according to experts.

Cryptocurrency exchange-traded funds are highly unstable and can lose their value just as fast as they receive it. They suit more knowledgeable investors who would be aware of the technology as well as the risks.

A Measured Dawn for UK Crypto

The retail ban has been lifted and has not ended. It is a kind of trying to strike a balance between innovativeness and prudence, access and control by Britain.

At least, investors can breathe a sigh of relief that the gate to regulated exposure to crypto is finally open. 

But until the systems can keep up, we must wait the game out. The irony is nearly poetic: years after they were being told that they could not buy, now the UK investors can, but cannot.

This policy can have changed overnight. It appears that the marketplace will go at its own pace.