Regulation
Is Britain Lagging behind in Regulating Cryptocurrencies?
Home to international investment banks, private equity funds and asset management firms, London has long been considered one of the world’s leading financial centers. And despite the shocks that the sector has suffered after Brexit, a recent EY survey demonstrated that London remains Europe’s leading destination for investment in financial services.
The City of London has long had a reputation for relaxed financial regulation, particularly after the deregulation of the London Stock Exchange in 1986 – so dramatic it was called the “big bang” – which propelled London to the top of global finance. .
Given the city’s proud history of financial boldness, it is surprising that Britain’s financial regulator – the Financial Conduct Authority – has been reticent in recent years to approve cryptocurrency exchange-traded products (ETPs).
But on May 28, the London Stock Exchange launched its first cryptocurrency-backed ETPs four ETNs Bitcoin and Ethereum (Exchange Traded Notes) became available to institutional investors.
However, retail investors were excluded from this offering, as was the FCA reiterated his long-held vision that “crypto-ETNs and crypto derivatives are not suitable for retail consumers due to the harm they pose.”
Continuing with a sobering warning to all would-be cryptocurrency speculators, the regulator warned that cryptocurrencies 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 UK financial regulator so concerned about it?
Exchange-traded notes are a type of debt typically issued by financial institutions that track the value of an underlying asset, in this case cryptocurrency. As a form of debt, the holder does not own the cryptocurrency itself, but rather receives a promise from the bank that they will pay the difference in the price of the asset at the end of the contract.
The FCA has imposed a set of rather stringent 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 deposit wallet or equivalent.
It’s certainly a cautious start, but as cryptocurrency investor Rotem Farkash explains, “London is a globally important financial market.” I am sure that the FCA’s decision will be welcomed by institutional investors based in the British capital.’
In the wake of America
ETNs are often confused with their better-known cousins, ETFs (exchange-traded funds), which have been available to retail investors since the 1970s.
Unlike ETNs, ETFs provide investors with ownership of a pool of assets, the benefit of which for retail investors is clear: by purchasing an ETF that tracks the S&P 500 index, the investor owns one share of each of the 500 largest American companies, offering a convenient and low-cost investment. cost tool for diversifying an investment portfolio without the hours of market research typically required.
And convenience aside, ETF investing has historically been extremely successful. A recent report from Standard and Poor’s found that, on average, 64% of active large-cap fund managers perform worse than the S&P500 Index in a given year.
The Security and Exchange Commission (SEC) finally acquiesced to crypto ETF demands on January 10, 2024, when it authorized 11 fund managers to issue spot Bitcoin ETFs available to retail investors, a move acclaimed by the New York Times as the beginning of a “new era”.
Few decisions by a financial regulator have been greeted with so much fanfare in recent years, as cryptocurrency investors believed they had finally gotten the mainstream recognition they had long craved.
Despite a slow startBitcoin and Ethereum have demonstrated strong growth since the SEC approval in January, reaching all-time highs in March 2024 and with Bitcoin, at the time of writing, comfortably above the $60,000 mark.
Which brings us back to London and the FCA’s decision to reject ETNs for retail investors. Five months after the SEC’s historic decision, cryptocurrency growth remains strong and the asset looks set to remain an important part of the financial markets.
Britain, however, lags behind its rivals, and despite the FCA’s reasonable concerns about retail investors’ exposure to cryptocurrency’s infamous volatility, the decision risks hampering the London Stock Exchange’s ability to remain a financial hub leader.
Image: Secret London
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