It’s been half a decade since the Financial Conduct Authority consulted on the ban of the sale to retail clients of investment products that reference crypto assets, which came into force in January 2021. Since then, much has changed and it’s past due that regulators considered the ban again.
The global regulatory environment has evolved and the UK is now in danger of being left behind, damaging its prospects of becoming an international crypto hub.
The US and Hong Kong have both recently launched bitcoin ETFs to great fanfare, providing access to both retail and institutional investors, while crypto ETPs have been available in the EEA for several years with no retail ban in place.
The FCA has recently taken a step towards bringing the UK in line with other leading jurisdictions by allowing the listing of BTC and ETH exchange-traded products, but these are still not available to retail investors.
In this environment, while they cannot invest in such products, UK retail investors looking to obtain exposure to crypto markets are most likely to purchase unregulated crypto assets directly on crypto exchanges.
A matured market
The core reason the FCA originally gave for the retail ban was the inability of retail clients to reliably assess the risks and value of crypto asset derivatives and ETPs.
The FCA gave several arguments why this was so, including that crypto assets have no inherent value, the presence of market abuse and financial crime, extreme volatility in prices of crypto assets and inadequate consumer understanding.
However, several years have now passed since the FCA’s original work. Since then, crypto markets have matured and if it were undertaken again today, it seems unlikely that the FCA would reach the same conclusions.
A strange logic
Beyond this, the FCA’s arguments were always as applicable to the crypto assets themselves as they were to investment products referencing them. But crypto assets themselves fall outside the FCA’s product intervention powers and none were banned.
While anti-money laundering regulation was extended to crypto exchanges, brokers and custodians, the FCA’s main role in relation to crypto assets as an investment product was to warn investors about risks.
The ban therefore resulted in crypto assets and ETPs relating to them, products with broadly similar risks, being regulated in different ways – achieving very different results.
Strangely, because of their custody and safe-keeping arrangements, it would seem that the banned product is likely less risky than the product only subject to regulatory exhortation.
A developing context
Regulatory changes since 2021 have given the FCA additional powers to regulate crypto assets. The financial promotion regime has been extended to crypto assets, with the FCA setting detailed requirements relating to the promotion or sale of such products to retail consumers – requirements that introduce a level of friction into the consumer journey.
Further regulatory changes will follow to treat crypto assets themselves as specified investments and introduce a market abuse regime relating to them.
In this developing context, the blanket retail ban increasingly looks out of step. Not only has the FCA devised an alternative approach to regulation of retail sales for crypto assets, which falls short of a ban, but regulatory changes are addressing some of the concerns that the FCA regarded as giving rise to the need for the ban in the first place.
