Bitcoin and Ethereum ETPs Launch on London Stock Exchange Following FCA Approval

The United Kingdom’s Financial Conduct Authority (FCA) has approved the launch of Bitcoin and Ethereum-based exchange-traded products (ETPs) on the London Stock Exchange (LSE).

These products, the WisdomTree Physical Bitcoin ETP and the WisdomTree Physical Ethereum ETP, are slated to commence trading on May 28. This marks a significant milestone as they will be among the first crypto ETPs to be listed in the UK, a move that aligns with the global trend of increasing accessibility to cryptocurrency investments.

Approval and Significance Surrounding ETPs

The FCA’s approval, granted on May 22, signifies a critical step for the UK market. The regulator’s decision will enable professional and institutional investors in the UK to invest in these crypto-backed products. This development comes in the wake of a 2021 ban on retail customers trading crypto derivatives, thus limiting the availability of these ETPs to only professional and institutional investors.

Alexis Marinof, head of Europe at WisdomTree, emphasized the importance of this approval, noting that it simplifies the investment process for UK-based professional investors who have previously accessed crypto ETPs through overseas exchanges. This move by the FCA follows a public announcement made by the LSE on March 25, which opened applications for cryptocurrency ETPs until April 8, with successful applications set for listing in May, contingent upon regulatory clearance.

To secure FCA approval, the crypto ETPs had to meet several stringent criteria. They needed to be denominated exclusively in Bitcoin (BTC) or Ether (ETH), be physically backed, and remain non-leveraged. Additionally, issuers were required to partner with an Anti-Money Laundering licensed custodian from the United States, the UK, or the European Union, and ensure that the underlying assets were held in cold storage.

The FCA’s decision mirrors a broader trend observed globally, where regulatory bodies are increasingly permitting cryptocurrency-based investment products. The approval of spot Bitcoin ETFs by the U.S. Securities and Exchange Commission (SEC) has significantly influenced this movement. The success of these U.S. ETFs, which have seen billions in inflows, has encouraged other nations to offer similar investment opportunities.

Hong Kong’s Crypto ETF Landscape

Hong Kong, for instance, has also approved the listing of spot Bitcoin and Ether ETFs. These ETFs stand out due to features such as in-kind transfers and denominations in three fiat currencies, allowing investors to purchase and redeem ETF units directly using Bitcoin or Ether. Despite these advancements, Hong Kong’s spot Bitcoin ETFs have underperformed compared to their U.S. counterparts.

Data from Farside Investors reveals that the three spot Bitcoin ETFs launched on April 30 in Hong Kong have attracted a total of $262 million in assets under management (AUM), with less than $14 million in inflows during the first week. This is a stark contrast to the billions seen in U.S. spot Bitcoin ETFs.

Farside Investors remarked that the launch of Bitcoin and Ethereum ETFs in Hong Kong is less significant than in the U.S. The performance of Hong Kong’s spot Ether ETFs, the first of their kind globally, has also been underwhelming, with a cumulative $54.2 million in AUM and $9.3 million in inflows by May 6. Despite these numbers, senior Bloomberg ETF analyst Eric Balchunas noted that the $310 million held by Hong Kong ETFs is proportionately significant, equating to $50 billion in the U.S. market context.

The relatively small size of Hong Kong’s equities sector, with a total market cap of $4.5 trillion compared to $50 trillion across U.S. exchanges, coupled with slower economic growth in mainland China since 2022, contributes to the illiquidity of Hong Kong’s market. A study by crypto exchange OSL found that nearly 80% of crypto-savvy investors in Hong Kong plan to invest in the new spot Bitcoin and Ether ETFs.

However, mainland Chinese investors face restrictions, as they must also hold Hong Kong residency to access these assets. This limitation, coupled with the exclusion of mainland Chinese RMB investors from purchasing these ETFs, results in low transaction volumes.

Investor Restrictions and Fee Disparities

SoSoValue researchers pointed out that the Hong Kong cryptocurrency ETFs have stringent investor qualification requirements, prohibiting participation from mainland Chinese investors. For example, Futu Securities requires account holders to be non-residents of mainland China and the United States before trading can be conducted. The expectation that mainland funds might trade through the southbound Hong Kong Stock Connect has not materialized, and opening this channel appears challenging.

Furthermore, the management fees for Hong Kong crypto ETFs, ranging from 0.85% to 1.99% annually, are significantly higher than the 0.25% average annual fees charged by U.S. issuers. SoSoValue noted that this fee disparity makes the holding cost of U.S. Bitcoin ETFs more attractive for institutional investors who are bullish on the crypto market and intend to hold these assets long-term.

Global Outlook for ETPs

The approval of Bitcoin and Ethereum ETPs on the London Stock Exchange represents a pivotal development in the UK market, offering professional and institutional investors new opportunities to invest in cryptocurrency-backed products.

This move is part of a broader global trend of increasing regulatory acceptance and market integration of cryptocurrency investments. However, it remains to be seen how the UK will compare to markets like the US and Hong Kong in terms of attractiveness and competitiveness.

Hong Kong’s crypto ETFs, which offer in-kind transfers and multiple fiat currency denominations, provide greater flexibility and convenience for investors. The UK may consider adopting similar features to enhance its appeal. As the UK continues to refine its regulatory framework and product offerings, it will be interesting to see if it can position itself as a leading hub for cryptocurrency investments, competing effectively with global markets.