Home to international investment banks, private equity funds, and wealth management firms, London has long been considered one of the world’s leading financial centres. And despite the shocks the industry has felt after Brexit, a recent survey by EY showed that London remains Europe’s leading destination for investment in financial services.
The City of London has long held a reputation for relaxed financial regulation, most notably after the de-regulation of the London Stock Exchange in 1986 – so dramatic it was termed the ‘big bang’ – which propelled London to the premier ranks of global finance.
Given the City’s proud history of financial daring, it is surprising that the British financial regulator – the Financial Conduct Authority – has been reticent in recent years to approve crypto exchange-traded products (ETPs).
But on 28 May the London Stock Exchange launched its first ever crypto-backed ETPs, as four Bitcoin and Ethereum ETNs (exchange-traded notes) became available to institutional investors.
Yet retail investors were left out of this offer, as the FCA reiterated its long-held view that ‘crypto ETNs and crypto derivatives are ill-suited for retail consumers due to the harm they pose’.
Continuing with a sobering warning for all would-be crypto speculators, the regulator cautioned that crypto assets are ‘high risk and largely unregulated, those who invest should be prepared to lose all their money’.
But what is an exchange-traded note, and why is the British financial regulator so worried about it?
Exchange-traded notes are a type of debt typically issued by financial institutions which track the value of an underlying asset – in this case, crypto. As a form of debt, the holder doesn’t own the crypto itself, but rather receives a promise from the bank that it will pay the difference in the asset’s price at the end of the contract.
The FCA has imposed a rather stringent set of rules for London’s crypto ETNs, stating that applications would only be approved if they were non-leveraged and backed by Bitcoin or Ethereum, of which 90% of the underlying asset must be held in an offline depositary wallet or equivalent.
It’s certainly a cautious start, but as crypto investor Rotem Farkash explains, ‘London is a globally important financial market. I’m certain the FCA’s decision will be welcomed by institutional investors based in the British capital.’
In America’s wake
ETNs are often mistaken for their better-known cousins, ETFs (exchange-traded funds), which have been available for retail investors since the 1970s.
Unlike ETNs, ETFs provide investors ownership of a bundle of assets, whose benefit for retail investors is clear: by buying an S&P 500 Index-tracking ETF, the investor owns a share of each of America’s 500 largest companies, providing a convenient and low-cost tool to diversify an investment portfolio without the hours of market research typically required.
And aside from convenience, investing in ETFs has historically been extremely successful. A recent report by Standard and Poor’s found that, on average, 64% of active large-cap fund managers fare worse than the S&P500 Index in any given year.
The Security and Exchange Commission (SEC) finally acquiesced to demands for a crypto ETF on 10 January 2024, when it authorised 11 fund managers to issue spot Bitcoin ETFs available to retail investors, a move hailed by the New York Times as the start of a ‘new era’.
Few decisions by a financial regulator have been met with such fanfare in recent years, as crypto investors believed they had finally achieved the mainstream recognition they long craved.
Despite a slow start, Bitcoin and Ethereum have demonstrated strong growth since the SEC’s approval in January, reaching record highs in March 2024 and with Bitcoin, at the time of writing, sitting comfortably above the $60,000 dollar mark.
Which leads us back to London, and the FCA’s decision to reject ETNs for retail investors. Five months on from the SEC’s landmark decision, crypto growth remains strong and the asset looks set to remain an important part of financial markets.
Britain, however, lags behind its rivals, and despite the FCA’s sensible concerns about exposing retail investors to crypto’s notorious volatility, the decision risks hampering the London Stock Exchange’s ability to remain a leading financial centre.
Image: Secret London
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