‘We’re massively behind’ with cryptofinance

0:12Sonia Rach: Hello and welcome to the FT Advisor podcast. Each week we pick a topic to discuss and this week we're diving into a big development for the UK's crypto landscape. The Financial Conduct Authority announced plans to lift its ban on crypto exchange traded notes, allowing retail investors to access them for the first time. It's a move that brings the UK more in line with the other European markets and it raises big questions about what this means for consumers and what it will look like. In today's podcast, we'll unpack the implications of this regulatory shift, look at how the UK compares to its neighbours and explore what's next for crypto regulation in Britain.

0:51Sonia Rach: I'm Sonia Arch, Deputy News Editor at FT Advisor, and joining me today are Colin Morris, Investment Manager at Parmenium, and Daniel Parkinson, Fort Hounder of the Bitcoin IFA. Good morning, both. Thank you all for joining me.

1:06Daniel Parkinson: Good morning, Sonia. Morning, Sonia. Pleasure to be here. Great.

1:10Sonia Rach: So, Colin, perhaps you can start by explaining a little bit about the crypto etns and and how they differ from other crypto investment products like etfs or direct ownership

1:21Colin Morris: and and what the kind of key elements are um okay so uh the crypto etns um my understanding is that the difference between an etf and etn is that an etf holds more than one type of asset so the crypto etns are very much going to be at least initially um one particular crypto asset in terms the regulation that would be either bitcoin or ethereum um compared to direct ownership these products will be packaged together by institutional providers um so the likes of blackrock 21 shares um and that means that those products um are looked after in a very different way compared to if you were to have direct ownership probably the key point there is that the private keys will be looked after by an institutional investor and not yourself.

2:16Sonia Rach: Right. So then why were, I guess, kind of knowing a little bit more about it, why were crypto ETNs sort of originally banned for retail investors in the UK? And what kind of has been the reason for the FCA to reconsider and change its stance now?

2:33Colin Morris: That's a great question. I mean, obviously, FCA is one of the primary drivers as an organization is to protect retail clients. And I think the reluctance over the years is obviously this is a nascent space. It's fast development. It's extremely risky in terms of the many different types of products that come out, many different types of cryptos. So I guess they wanted to take time to see how the market developed and matured before they felt more confident in terms of, I guess, giving their regulatory backing to these investments. They're still cautious because there's still lots of risks involved.

3:11Colin Morris: But the reason why they've come to this stage now is because of international peers getting to this stage somewhat ahead of us. I see.

3:21Sonia Rach: And I guess, obviously, that's kind of the big question at the moment that people have. I mean, this change by the FCA on crypto, you know, there's a lot of things that have come out recently. So, Daniel, I guess in your kind of point of view, you know, as an IFA in this space, what would you say this kind of change and decision means for everyday retail investors in practical terms?

3:44Daniel Parkinson: It's a really good question. for everyday retail investors. They will now be able to buy Bitcoin and ETH, ETNs, within their tax wrappers. So Bitcoin and crypto. Also, I think it's important to highlight at this point, Bitcoin and crypto are separate, right? They shouldn't be lumped together. The FCA have been repeatedly told this by the great people, the great work that's done by Bitcoin Policy UK. So Bitcoin is analogous to digital gold. All other cryptos are analogous to VC-backed tech startups or penny stocks. So ETH is a VC-backed tech startup. Unicorn Fart Dust is a penny stock. Bitcoin is analogous to digital gold.

4:33Daniel Parkinson: um so no crypto including bitcoin has been banned you have been able to get access to it and as colin alluded to is through self-sovereignty self self-custody you can buy it on chain through exchanges now that's led to people having to use offshore exchanges right it's also technically very difficult so it's beyond the technical aspect of most people um and so for the first time in four years people will be able to own a bitcoin or have some bitcoin exposure within their tax wrappers um for ifas it doesn't really change so because it will remain being a restricted mass market investment or instrument i always forget what the i stands for um uh the the routes to market for ifas will remain the same which will mean they they will need some kind of Bitcoin exposure from their DFM or from their NPS provider.

5:31Daniel Parkinson: And there are conversations happening there. I think there are going to be a number that are live on the 8th or shortly after.

5:38Sonia Rach: Sure. And obviously, when it comes to crypto and crypto ETN specifically, they do remain sort of high risk investment. So in terms of safeguarding, what will sort of be in place for retail investors?

5:54Daniel Parkinson: Well, that's a really interesting question. So, I mean, safety is completely subjective risk is subjective um you know if you're starting from zero if you're 17 and you're looking at the fact that the uk's average house price is beyond anything you're ever going to be able to afford wages have stagnated in real terms inflation has skyrocketed asset prices have skyrocketed and you've got nothing right you work in tesco's for minimum wage and then a hundred percent allocation to bitcoin in that example may not be unsafe right it may be you know relatively risk-free because you're starting from nothing so if bitcoin goes to nothing then you know you're in the same position and in that example you want a highly volatile asset because volatile works both ways so you want something that accretes and outpaces inflation very rapidly.

6:48Daniel Parkinson: In terms of safeguards, honestly, I don't know. I don't know what training there is for them. I mean, my focus, I'm not technically an IFA. I train IFAs on Bitcoin and crypto and other cryptos, specifically so that they're able to talk to their clients in a way that is calm and confident and knowledgeable about this new asset class. In terms of retail, my fear is they may end up taking their knowledge from TikTok influencers. Now, if they know what they're doing, right, if they're aware of, for example, Bitcoin's four-year cycle has a very observable and trackable four-year cycle, which is three years up, one year down.

7:32Daniel Parkinson: A risk is that we are letting retail in at what is, if this cycle is to play out like previous cycles, we are letting them in at the top so historically we see somewhere between 30 to 60 percent of all of the gains of each cycle within the last three months if this plays out like previous cycles those three months are q4 this year so we are literally letting retail in at the top So if they are unaware that to date, Bitcoin has a 99.8%, it's not quite 100%, 99.8 % hit rate of returning more, as long as you have held it for a period of 200 weeks or more. So four years, right? There's that observable four-year cycle.

8:22Daniel Parkinson: So even if you've gotten really, really, really unlucky and you've bought one Bitcoin at all of the four peaks, so you literally bought it on the day that it peaked on the previous four cycles, it would have cost you about$90 ,000. You would have four Bitcoin and today that would be worth about$450 ,000. So my fear is that retail will not have access to that knowledge, that it's a minimum investable period of four years if you're going to lump some in. And that aligns very well with the FCA's guidance for financial advisors, which is if you're going to invest, it's a minimum of five years.

9:01Sonia Rach: Yeah, yeah. And I think that's the biggest issue, isn't it? That a lot of retail investors are kind of doing it on a short term basis rather than a long term basis. And, you know, this whole rise of influencers of, you know, timing the market and trying to do that rather than the time in the market. The historic kind of saying is something that I guess will be applicable to crypto as well. When it comes to, I guess, lifting the ban and obviously looking at it from a regulatory point of view, and I don't know here if, Colin, you want to come in, but do you think lifting the ban kind of signals a wider shift in the FCA's attitude towards crypto?

9:42Sonia Rach: Because we're hearing more and more about it from that sort of point of view.

9:48Colin Morris: I'm not sure, to be honest. I think they are right to be cautious to an extent, echoing Daniel's comments earlier about Bitcoin versus crypto. I think there's a reason why Bitcoin and Ether are the two regulated assets. There's a very, very high bar if you're going to be a credible store of value as an investment. And most cryptos fall very, very far short of that. I mean, the one thing I would say is that, you know, a recent YouGov survey on behalf of the FCA showed that just 2 % of crypto asset owners have used a financial advisor. So I feel that that is the kind of space that needs to be encouraged more.

10:35Colin Morris: We need more financial advisors helping retail clients in this space. And I think we're taking baby steps towards that. But I do think that more support and guidance is going to be needed in order to bring that community, the financial advisor community, into this space and to help retail clients navigate that.

10:57Sonia Rach: Yeah, the change specifically. And obviously, the FCA kind of when it came out said that this sort of aligned the UK with more with kind of other jurisdictions. So how far behind are we compared to countries like Germany, Switzerland, other areas in Europe?

11:17Colin Morris: We're massively behind. The European average adoption rate is above the UK's adoption rate in terms of crypto adoption. Obviously, the US has regulated at the beginning of 2024, which has led to a boom in the market. And to Daniel's point, we're now letting retail investors access these products and tax efficient wrappers, potentially a bit of a wrong time in terms of market cycles. That remains to be seen. But certainly we're behind the curve. Also, that restricted mass market investments classification, that is something that is more onerous than what we see in other regions. Sure.

12:02Sonia Rach: And Daniel, how might this impact the competitiveness of the UK compared to the other European financial centres?

12:11Daniel Parkinson: I think there's a number of things to touch on there. So in terms of being attractive to overseas or external investment, I think it could certainly be to our detriment. That being said, there is a lot of trapped capital in the UK that can't go overseas. So that, I believe we will see an influx from trapped capital. I can give you a real world example of this. And this is actually one of, this is a rumor that I've heard. So please, you know, don't trust, verify this for yourself. But one of the reasons that the FCA had to move very swiftly on this, a lot quicker than they wanted to. So my understanding is that we have a lot more outcome from the FCA's consultations are coming in 2026.

13:05Daniel Parkinson: And it was then that they really wanted to wait for. But we had a company called SmarterWeb launch on the Aquis Exchange in April this year, I believe. And they're essentially a Bitcoin treasury company. So they are now a listed equity on the Aquis Exchange. They will move on to the LSE at some point. When they do, they immediately qualify for the FTSE 250, which will unlock a lot of trapped capital in the UK from index funds and things like that that can only invest in equities. So there's a lot of trapped capital there. There's also a lot of trapped capital in financial advisors, pension schemes, that kind of thing, BC pension schemes, DB pension schemes.

13:49So I'm not sure it will affect our competitiveness in a huge way, other than potentially for capital that is globally mobile, then it will.

14:00Daniel Parkinson: Like it absolutely will, because why would you come to a jurisdiction that is clearly still quite anti this new asset class and are moving at a snail's pace compared to the likes of Germany, Switzerland, the US, etc.

14:15Sonia Rach: And that kind of ties me into the next question, which is just sort of around whether this move could help the UK position itself as a crypto hub or is it still playing catch up? And by the sounds of it, obviously, it seems like you're kind of leaning towards the latter. Is that the case?

14:33Daniel Parkinson: Absolutely. Absolutely. I mean, if the UK seriously wanted to position itself as competitive in this space, they would immediately start looking at things like how do we build the rails for self-sovereignty within our tax wrappers? Right. So I want to hold on-chain Bitcoin in my ISA and my SIP. I don't want to have to be pushed into a SaaS to do that. You can do that now, but that obviously restricts you to being a limited company owner or working for a very Bitcoin slash crypto friendly limited company owner.

15:09Sonia Rach: Yeah.

15:11Daniel Parkinson: So I think, yeah, until we start to see serious regulatory change and as Colin alluded to that the restricted mass market investment classification of. so crypto i would actually be quite happy to leave as restricted mass market investment but bitcoin should not be should absolutely not be this is a mature asset class it has traded 40 more hours in 16 years than the nasdaq has in its entire history since 1971 it trades 24 7 365 you know it's globally liquid this is a mature asset class that is returning roughly 60 a year since 2020 and 125 % since inception in terms of CAGR. Yeah, that's a lot.

16:00Daniel Parkinson: So if we really wanted to position ourselves, we would move straight to the front of that list of geographies, jurisdictions, and say, look, this is what we're going to do. This is how we're going to outline it. We don't even need to move that quickly. But what we do need to say is this is our plan to get to the front of that queue, and it may take two or three years. but within that time you know two or three years from now you'll be able to hold on-chain bitcoin within your iso within your cip or on-chain you know if you want to really want to you can hold on-chain unicorn fart dust do not recommend right one out of ten do not recommend but holding on-chain bitcoin figuring out what your risk tolerance is to the volatility holding on-chain bitcoin within your iso and your sip 10 out of 10 do recommend and until we start laying those rail and those rails exist.

16:51Daniel Parkinson: I mean, I'm in conversations with a company in Canada. Those rails exist. It's just a question of how quickly are we going to build them into the UK landscape?

17:00Sonia Rach: Yeah, and how long it will take, I guess. And Colin, what lessons do you think kind of the UK can learn from other countries' approaches to retail access to crypto investment products?

17:11Colin Morris: I think the main lesson they can learn is that there's a huge appetite amongst retail investors, and particularly amongst younger demographics and particularly amongst, I guess, investors that have less capital and that do feel that they do need to take on that risk. They do need that extra volatility because they need that extra return with the cost of living crisis and the housing crisis. It's no surprise that people are seeking out these very, very high risk investments. I think the lesson to learn is that they need support. And at the moment, the way things are structured in terms of regulation in the market, it's not structured in a way that is making it easy for financial advisors to provide that support.

17:55Colin Morris: So that is something that I think should be a huge focus, increasing the number of retail investors that take advice in this topic.

18:05Daniel Parkinson: I think, Colin, you alluded to it earlier that Aviva recently released a study that showed that I think it was 22 % of UK adults have some kind of crypto exposure right now in the UK. 9 % of UK adults took financial advice last year. So you can see there's twice as much, at least 2.5x demand for exposure to these assets than there is for financial advice. And I'm sure the demand is there for the financial advice, but I think something like consumer duty has essentially priced most people out.

18:47Sonia Rach: Yeah, and that's, it's quite fitting because it's sort of one of those things where they're relaxing it, but what does it actually mean for people that need access to advice and then the kind of advice gap specifically as well, which is, I guess, a whole nother topic. But with the requirements that are in place right now, do you kind of expect that we'll see further easing of restrictions on crypto investment products in the near future? Or what do you think that will look like?

19:17Colin Morris: I think it will take some time. And as we've seen in the past with crypto and interest in crypto, it's very much tied to market performance as much as anything. So if there was to be a cycle crash or any sort of controversy in the space, like we've seen in previous years, potentially that could slow things down again. I hope it doesn't. And I hope that we do move further forward in terms of providing more guidance and slight easing in terms of just allowing that advice gap to be filled more than anything else.

19:54Sonia Rach: yeah and um daniel in terms of i guess the the role that crypto etns will play in kind of bridging traditional finance with crypto markets obviously i know you've kind of touched quite a bit on the difference and and bitcoin what its role plays but what would you say is the case here

20:15Daniel Parkinson: in terms of how it would bridge crypto and traditional finance the etns you mean yeah Yeah. Okay. I think what you're going to find is a lot of people who want exposure to Bitcoin, certainly within their tax wrappers, are going to plow into the UTNs as soon as possible. then as I say the fear becomes do they have the knowledge to hold through what historically would be somewhere between a sort of 40 to 70 percent draw down in 2026 if this cycle plays out like previous cycles it's a first step it's a baby step right honestly it's a baby step and just I just want to touch on the question you asked Colin earlier which is you know do we do do we believe that there's going to be more regulation I would say hopefully but it will be begrudgingly from the FCA they they really do not like this asset class for some reason yeah yeah I mean that's

21:18Sonia Rach: a fair point and I think it kind of shocked a lot of people when they when they sort of um came out with uh the statement a couple of months ago so it is one that is I think a lot of people are curious about what it means and where it's going to kind of go from here. And that's why I think this will be one to watch for sure. Unfortunately, that is all we've got time for today. But I just want to say thank you to you both for coming on to discuss such an important topic. I'm sure kind of we'll be speaking again once the FCA has sort of made its next statement, hopefully next week, but we'll see.

21:56Sonia Rach: And of course, thank you to all of those that are listening. Join us next week as we discuss another hot topic in the financial services industry.