A relaxed read on the issues of the day
By Joanne Benson, Portfolio Manager at Copia Capital Management
The gyrations in the Bitcoin price have filled many column inches in the financial press over the last few months, but last week the Binance cryptocurrency exchange (the largest exchange, by volume) made the news as part of the FCA’s continued attempts to push back against investment in crypto assets.
The FCA’s announcement made it clear that Binance is not permitted to undertake any financial business in the UK that requires registration or authorisation. While the FCA’s position will not prevent Binance’s UK customers from accessing crypto assets through Binance’s Cayman Islands domiciled exchange, it will prevent Binance from setting up an exchange in the UK and advertising its services in the UK. In the days since the announcement, Binance’s UK customers’ access to their money has been limited with deposits / withdrawals through the Faster Payments system suspended.
The FCA has become increasingly vocal on the risks of investing in crypto assets, which it describes as “speculative” in nature and warning that consumers must “be prepared to lose all their money”. As an unregulated investment it points out “if something goes wrong [consumers] are unlikely to have access to the FSCS or the Financial Ombudsman Service.” The Bank of England has also been at pains to point out the risks: BoE Governor Andrew Bailey advised against buying crypto assets such as Bitcoin and Ethereum, warning that they “don’t have intrinsic value.”
The regulation of crypto assets may not fall within the FCA’s remit, but the regulator has been clear that the companies offering these investments do still have responsibilities under UK law and at the most basic level these companies should be FCA registered and complying with regulation on anti-money laundering regulations and record keeping. The FCA website contains a long (but not exhaustive) list of unregistered crypto businesses which appear to be operating illegally, including one that seems to be running through a hair salon.
Despite the risks, the market in crypto assets has continued to grow and the gains made by some, have tempted others to invest. An FCA survey found 2.3 million people in the UK now hold crypto assets, up from 1.9 million in 2020. Many of those will recognise that investment in Bitcoin and other crypto assets are a bit of a gamble and they will have thought carefully about how much they can afford to lose, but the research suggests significant number of people do not have a good grasp of crypto assets. Additionally, 14% have borrowed money from family / on credit cards to buy into the trend, which is particularly alarming.
By contrast, there are few options for professional investors looking to gain exposure to crypto assets. One fund management group we have spoken to managed to gain exposure in its multi-asset portfolios via an underlying manager who set up an account on the Coinbase exchange. Another fund group’s crypto strategy is hard for UK clients to access, but the group expressed surprise at the lengths some professional investors would go to to invest, particularly as it had agreed with the regulator that it would not advertise.
We think crypto assets will have an important role in the future, with clear value in the Blockchain technology. Bitcoin, which had fallen ~40% since April following Chinese regulatory clampdown, may not necessarily ‘win’ in the longer term as governments look to launch their own crypto assets. The stance of the regulator and an absence of investment options means professional investors will need to be patient, and we’d argue that a clearer regulatory framework and time to see how the space develops, is not necessarily a bad thing.