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Managers of cryptocurrency investment products have hit back at the UK regulator’s warning to consumers against putting money into the high-risk investments.

The UK’s Financial Conduct Authority has banned the sale of cryptocurrency-related derivatives, including exchange traded notes, to retail investors. It also renewed last week its warning that anyone investing in crypto assets “should be prepared to lose all their money”.

However, industry figures say the ban and warning are short-sighted because they are likely to increase risks for retail investors and run against wider market demand, with institutional investors increasing investment in cryptocurrencies.

Hector McNeil, co-founder of HANetf, which distributes Bitcoin Exchange Traded Crypto, an exchange traded commodity, said: “The FCA’s decision has basically pushed retail investors from a regulated product on a regulated exchange to the wild west underlying crypto markets.”

Mr McNeil said the regulator was moving UK investors from “a regulated environment on to unregulated markets and market infrastructure where abuse, fraud and errors will be significantly increased”.

This article was previously published by Ignites Europe, a title owned by the FT Group.

Townsend Lansing, head of product at Coinshares, which manages the XBT range of ETNs, agreed, saying: “The FCA’s initiative will do little to hinder digital asset adoption overall, but represents significant disadvantage for UK investors.”

He added: “We believe that although digital assets are indeed innovative, wrapping them into exchange traded products is a fairly normal extension of the industry’s unique ability to offer exchange traded access to a diverse set of underlyings.”

Adrian Whelan, global head of regulatory intelligence for investor services at Brown Brothers Harriman, said: “There is an amount of cognitive dissonance in the regulatory space on crypto at the moment.

“On the one hand, regulators are moving quickly to implement a solid foundation of laws and regulation for crypto investing, while at the same time they have taken enforcement actions and banned some corners of the crypto market.”

The UK ban comes into place after rapid growth in cryptocurrency investment products over the past year.

European mutual funds, ETNs, ETCs and ETPs investing in cryptocurrencies saw assets under management increase fivefold in 2020, rising from €470m to €2.3bn over the year, Morningstar data show.

Companies offering cryptocurrency products predict that growth will continue despite this volatility.

“I think [the sector] has turned a corner,” said Mr McNeil.

“Institutional use will increase [and] this will also bring better price discovery and stability, and ultimately reduce volatility. However, that will take time . . . and all product providers need to work hard on investor education,” he said.

UK fund house Ruffer recently revealed that it had invested in bitcoin through an investment trust and its multi-strategies funds.

Ruffer said it viewed bitcoin as “a small but potent insurance policy” and its exposure was “primarily a defensive move”.

“We believe bitcoin is poised for a wave of mainstream institutional adoption,” the company added.

Christopher Bendiksen, head of research at Coinshares, said the rise of cryptocurrencies represented “the emergence of a new asset”.

“For any asset to rise from zero to a multitrillion-dollar total valuation — all via the noisy action of the free market — it would simply be impossible to avoid some volatility along the way,” Mr Bendiksen said.

However, Finance Watch, a Brussels-based consumer group, backed the FCA’s action.

The UK regulator’s initiative was “a drastic but justifiable step to protect the general public from harm as long as the regulatory and supervisory frameworks for issuing, selling and trading these instruments is still work in progress”, according to Christian Stiefmüller, senior research and advocacy adviser at Finance Watch.

“While the differences between a classic cryptocurrency, such as bitcoin, Facebook's Libra/Diem, and an algorithmic stablecoin may be perfectly obvious to sophisticated institutional investors, we should not blithely assume that this is the case for a majority of retail customers,” he said.

The returns of cryptocurrency products with longer records have been volatile over recent years.

Tobam’s Bitcoin Fund has risen 270.7 per cent over the past year, while its annualised return over the past three years is 42.2 per cent, according to Morningstar data to the end of January 18.

The XBT Provider Bitcoin Tracker Euro ETN has generated a return of 301.6 per cent over the past year, although its annualised return is 47.4 per cent over three years. The firm’s Ether Tracker Euro ETN has posted a 750.7 per cent return over one year and annualised performance of 10.4 per cent over three years to January 19.

Mr Stiefmüller said: “With memories of earlier bubbles in 2000 and 2008 receding, many retail investors may also be driven, once again, by a fear of missing out.”

“In the absence of common terminology, standardised disclosures and minimum safeguards for investors, even asset managers and financial advisers who take their duty of care towards these investors very seriously remain exposed, both legally and reputationally,” he added.

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at igniteseurope.com.

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