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Funds in the United States that mirror the price of Bitcoin could begin trading as early as today, after the Securities & Exchange Commission (SEC), the US financial regulator, gave them the green light, writes Andrew Michael .
But UK investors keen to gain exposure to similar products could have to wait years for a similar decision here, if one is ever made regarding Bitcoin, the world’s largest cryptocurrency, or other tokens.
The SEC, the equivalent of the UK’s Financial Conduct Authority, approved the first ‘spot’ Bitcoin exchange-traded funds (ETFs). In this context, ‘spot’ means you can buy and sell the fund at the current market rate – the ‘spot’ price. This distinguishes them from existing futures-based Bitcoin funds.
ETFs are ‘passive’ investments which combine the characteristics of direct investment in shares with those of pooled or collective funds. They have become increasingly popular in recent years, with ETF assets under management on the London Stock Exchange standing at nearly £1 trillion in July 2023.
Created in 2009, Bitcoin is the largest and oldest cryptocurrency, a form of digital currency that exists without conventional financial borders and whose record keeping of transactions is maintained on line in an electronic ledger known as blockchain.
Over its lifetime, the price of Bitcoin has oscillated wildly. Most financial regulators view the currency as highly speculative as traders risk losing all their money with no recourse to compensation.
ETFs focused on Bitcoin are seen as a way of shielding investors from the risks associated with holding Bitcoin directly.
To create an ETF, a provider buys a basket of assets to create the fund and then sells shares in the fund to investors. The value of these shares reflects the value of the ETF itself, as determined by the performance of the underlying assets, with a Bitcoin ETF tracking the price of the token in question.
The SEC’s decision means investment companies including BlackRock, Fidelity and Invesco will be able to offer ETFs to retail investors in the US.
According to the UK investing platform Bestinvest, the move is expected to “attract a new and wider constituency of investors, both institutional and private, to the digital currency”.
Following the SEC’s announcement on Wednesday, Bitcoin was trading close to its two-year high of £36,413. The currency has risen by around 70% since last autumn and, in anticipation of the SEC decision, had also risen by 7% since the start of 2024.
However, its current price remains some way off its all-time peak of just over £48,000 in 2021.
In spite of today’s news, Jason Hollands, managing director of Bestinvest, warned that Bitcoin enthusiasts in the UK will have to wait to have the same chance to invest as their US counterparts: “I am doubtful the FCA will authorise Bitcoin or other cryptocurrency ETFs to be made accessible to UK retail investors any time soon. The FCA has repeatedly flagged concerns about the extreme volatility of crypto assets, the high risk of losses and the difficulties retail investors face in valuing them.”
Laith Khalaf, head of investment analysis at AJ Bell, said: “The SEC decision is a giant step for crypto into the mainstream, a watershed moment. But even with SEC approval, it isn’t a slam dunk that we will get funds over here because the UK regulator may not approve their sale.”
Bestinvest’s Mr Hollands said that for an ETF to be made directly available by a UK-regulated investment platform, under a regulation known as Packaged Retail and Insurance-based Investment Products Regulation, or PRIIPs, fund providers would have to comply with UK regulatory requirements in terms of producing a key information document, which a US-listed ETF wouldn’t have.
He said: “Even were Bitcoin or cryptocurrency ETFs to become authorised in the UK in the near future, it is possible that these would be primarily accessible for professional investors such as discretionary fund managers or those certified as sophisticated investors.
“This is because of the introduction of the FCA’s Consumer Duty principle, which was a major regulatory development in the financial services sector last year. It aims to increase consumer protection for retail investors and ensure regulated firms are focused on good client outcomes.
“As a result, execution-only investing platforms have become more cautious about the access they provide to higher risk or more complex products, rather than relying on the caveat emptor, or ‘buyer beware’, principle which was widely assumed to have prevailed previously.”
AJ Bell’s Mr Khalaf said: “The FCA is walking a bit of a tightrope here between keeping consumers safe and the government’s ambition to make the UK a global hub for cryptoasset technologies. Bitcoin has endured a number of scandals and huge price volatility, but large investment groups are clearly still interested in packaging it into a tradeable product for punters.”
Hinesh Shah, forensic accountant at law firm Pinsent Masons, said: “Bitcoin ETFs are not currently authorised and regulated in the UK. There are no UK Bitcoin ETFs.
“A UK individual could buy Bitcoin ETFs but not through a UK broker, as they would be regulated by the FCA. If a UK individual opened a trading account with a US broker, for example, they may then be able to access Bitcoin ETFs, but there could also be challenges depending on which banks they use to transfer funds and their policies regarding crypto.
“The SEC approval relates to spot Bitcoin ETFs. That is investment vehicles that invest directly in bitcoins as the underlying asset and allow individuals to gain exposure to the price of Bitcoin without directly purchasing it.
“Other types of Bitcoin ETFs already exist. In the US, for example, seven Bitcoin ETFs have been approved by the SEC for trading in the US but currently these ETFs can only hold Bitcoin futures contracts or stocks of companies/other ETFs that have exposure to cryptocurrency.”
