A Ray of Light for Crypto in the UK!

In contrast to the EU, crypto assets have had a tougher time gaining acceptance in both the U.S. and the U.K. but there is now a distinct ray of light at the end of the tunnel in both countries.

Until January of this year the U.S. Securities and Exchange Commission (‘SEC’) and, in particular, Gary Gensler, its chair, had adopted a ‘just say no to crypto’ approach to crypto assets, deeming virtually every American crypto business activity conducted by the platforms as requiring registration with the SEC as a ‘security’ which would require them to follow the SEC’s complex security regulations.

The SEC ruled that a crypto asset fell under its jurisdiction if it met the standard known as the Howey Test, a 1946 Supreme Court ruling where the court held that a contract fell under the SEC’s jurisdiction if someone invested ‘money in a common enterprise and is led to expect profits solely from the efforts of a promoter or third party’ which applied to most crypto assets.

The SEC further justified its stance to prevent fraud, reduce market manipulation and force more disclosure of relevant information to investors and cryptocurrency holders following the collapse of major players FTX, BlockFi, Voyager Digital and other platforms.

Among the many crypto asset products that had applied for registration and been rejected over the previous five years were more than 20 disapprovals for filings for new spot bitcoin exchange-traded products (ETPs).

This all changed in January 2024 when the District of Columbia Court of Appeal held that the SEC had wrongly disapproved the filing of an application made by crypto asset manager, Grayscale, which contemplated the conversion of the Grayscale Bitcoin Trust into an ETP, saying that the Commission had failed to adequately explain its reasoning in disapproving the listing and trading of Grayscale’s ETP and referred the matter back to the Commission.

The SEC considered the findings of the court in detail and in a landmark ruling on January 10th 2024 the SEC announced it was approving the listing and trading of the Grayscale spot bitcoin ETP shares. Chair Gensler commented that he felt that ‘the most sustainable path forward is to approve the [Grayscale] listing and trading these spot bitcoin ETP shares’ but adding the caveat that it ‘should in no way signal the Commission’s willingness to approve listing standards for crypto assets’.

Nonetheless, this was an opening for crypto as not only did the SEC approve Grayscale’s application but it approved eleven applications in all, including those of BlackRock, Fidelity and Invesco.

This seems to have prompted the UK regulator, The Financial Conduct Authority  (FCA) to rethink its own tough stance on crypto as it had become an outlier in not permitting trading in ETP, although it still took markets by surprise when it announced, on 11th  March 24, that it ‘would not object to requests from Recognised Investment Exchanges to create a UK listed market segment of crypto asset- backed Exchange Traded Notes [but] these products would be available for professional investors, such as investment firms and credit institutions authorised or regulated to operate in financial markets only.’

The announcement brings the UK more into line with the EU, Australia, Brazil, Canada and the U.S. although the industry is disappointed that UK trading will initially be limited to professional investors only.

The new approved US bitcoin ETP’s have already attracted $10bn since their launch in January and it is expected that there will now be a flurry of applications for UK listed ETP’s by the major players before they start trading in April 24.

FMCR has first-hand experience of the crypto market and would be happy to assist clients and potential clients. For a free initial consultation please contact us at contact@fmcr.com.