Almost half (45%) of UK-based investment advisers have reported that clients are intending to step outside of the adviser relationship in order to gain exposure to digital assets, highlighting how a lack of domestically regulated crypto products, including ETPs, is frustrating investors in the country.
Jason Guthrie, Head of Digital Assets, Europe, WisdomTree.
This was a key finding in a recent survey commissioned by ETP issuer WisdomTree which polled 600 professional European investors collectively managing €400 billion in assets on their views on the crypto asset segment.
The research uncovered that UK-based advisers, including wholesale financial advisory firms, wealth managers, and family offices, view the regulatory landscape to be a major barrier when allocating capital to crypto assets, cited by 34% of respondents in the country.
Equally significant hurdles included crypto assets’ perceived lack of intrinsic value (cited by 35% of UK advisers) as well as a lack of trust (34%).
Regulatory affirmation
The case for crypto assets as a legitimate investment received a major boost in Europe in March 2020 when BaFin, the German financial regulator, announced that it officially recognized cryptocurrencies as financial instruments.
This ruling opened the gates for crypto asset ETPs to list on Deutsche Börse Xetra, continental Europe’s largest regulated exchange, with a wide range of issuers including WisdomTree, ETC Group, 21Shares, CoinShares, and Iconic Funds all introducing directly backed crypto asset ETPs in the months since.
Crypto asset ETPs offer access to their underlying cryptocurrency through a simple, regulated vehicle that allows investors to bypass the risks and technical challenges of managing public and private keys, setting up digital wallets, and trading on unregulated exchanges.
The current line-up of crypto asset ETPs on Xetra now includes products providing exposure to bitcoin, ethereum, bitcoin cash, litecoin, solana, polkadot, cardano, stellar, and tezos.
Other European regulators, including Switzerland’s FINMA and France’s AMF, have also increasingly been receptive to overtures from ETP issuers, with many of these ETPs now cross-listed on exchanges such as SIX Swiss Exchange and Euronext.
‘On the books’
Regulatory supervision, alongside an ever-increasing catalogue of products, has largely enabled advisers in the European Union to keep their clients’ crypto asset investments ‘on the books’.
This has not been the case in the UK where the Financial Conduct Authority (FCA) has been far less accommodating. It is yet to approve the listing of a crypto asset ETP despite the various safeguarding features conferred by the product’s structure.
The watchdog has also banned outright the sale of crypto-related derivatives to retail customers and, in January 2021, issued a warning that retail investors choosing to invest in cryptocurrencies should be prepared to lose their entire investment.
However, despite the FCA’s rigid stance, recognition of digital assets continues to grow in the UK with seven out of ten (72%) UK advisers reporting to have discussed cryptocurrencies with their clients – possibly as a tool to enhance portfolio diversification or as a store of value.
According to Jason Guthrie, Head of Digital Assets for WisdomTree in Europe, this means that advisers need to be ahead of the curve to ensure clients’ portfolios are managed effectively and the risks around investing in this new asset class are minimized.
“If clients are willing to step outside of their adviser relationship, the best thing an adviser can do is get up to speed on the asset class and guide them on their journey into cryptocurrencies as this will minimize capital risk. Risk management and education should be a priority, especially with such a nascent and fast-moving asset.”