Can UK investors buy US spot Bitcoin ETFs?

Following the launch of U.S. spot Bitcoin BTC -2.56% exchange-traded funds in January 2024, UK retail investors may be wondering if they can now gain access to such products. 

The short answer to this question is no. However, this article aims to shed light on the current landscape for UK investors looking to gain exposure to bitcoin through investment vehicles, leveraging insights from recent developments and regulatory perspectives.

What is a spot Bitcoin ETF?

Before delving into the specifics of UK investors' accessibility to U.S. spot Bitcoin ETFs, it's essential to understand what these financial instruments are. Spot Bitcoin ETFs are investment vehicles designed to track the price of bitcoin directly and are traded on traditional stock exchanges.

Unlike futures-based ETFs, spot Bitcoin ETFs are backed by the actual underlying cryptocurrency held by a custodian on behalf of investors. They provide exposure to bitcoin's price movements without needing to directly buy or store the digital asset themselves.

UK access to bitcoin investment vehicles

Currently, UK retail investors face regulatory and practical hurdles that prevent them from investing directly in U.S. spot Bitcoin ETFs. The primary challenge lies in the regulatory frameworks governing securities in both countries, which do not always align seamlessly for cross-border investments.

UK investors interested in U.S. spot Bitcoin ETFs would have to navigate these complexities, including understanding the tax implications and compliance requirements under UK law, and employ potentially costly strategies, such as setting up foreign entities, to access the products, which simply isn't practical.

There could also soon be a new avenue available for UK institutional investors to gain indirect exposure to bitcoin via exchange-traded notes (ETNs) listed on the London Stock Exchange. But retail investors will again have to wait.

Regulatory landscape in the UK

The Financial Conduct Authority (FCA), the UK's financial regulator, has taken a cautious stance toward the crypto space in an attempt to ensure investor protection while trying to foster innovation.

In 2021, the FCA banned the sale of derivatives and exchange-traded products to retail investors. However, the UK's stance on cryptocurrency regulation has subsequently been evolving.

Statements from the FCA in March 2024 indicate a willingness not to block requests for crypto ETNs for professional investors, a potentially positive signal for the broader acceptance of crypto-related financial products.

Furthermore, the London Stock Exchange announced plans to start accepting Bitcoin and Ether ETN applications in Q2 2024, with crypto ETN trading to commence from May 28, 2024. These products offer similar exposure to Bitcoin's price movements, albeit through a slightly different financial structure than a direct ETF.

ETNs do not own the underlying assets they represent. Instead, ETNs are unsecured debt securities issued by a bank or another financial institution that promise to pay the holder a return equivalent to the performance of a specific index or asset, minus fees and expenses — exposing investors to credit risk associated with the issuer.

The US and UK market connection

The approval of spot Bitcoin ETFs in the U.S. set a precedent that many investors and financial institutions in the UK are eager to follow. The U.S. Securities and Exchange Commission (SEC) had been cautious about approving such funds, focusing primarily on futures-based products. However, their eventual approval could influence regulatory attitudes and investor interest globally, including in the UK.

Kraken's UK Managing Director Bivu Das is among those optimistic about the potential for a Bitcoin ETF in the UK, emphasizing the importance of these financial products in providing regulated investment opportunities to a broader audience.

Das explained that the world has changed significantly since such products were restricted in the UK in 2021. "The UK has always said it wants to be a crypto hub. And this is one of the basic fundamentals potentially for meeting that definition," he added.

This sentiment is echoed by some financial experts and industry insiders who see the integration of cryptocurrency into traditional financial products as inevitable and beneficial for diversifying investment portfolios.

Looking ahead: The future for UK investors

The financial landscape is rapidly evolving, with cryptocurrencies and blockchain technology at the forefront of this change. As regulatory bodies in the UK and globally continue to adapt, it's plausible that direct investment in U.S. spot Bitcoin ETFs by UK investors could become more straightforward in time.

Such a development would not only mark a significant milestone for the integration of cryptocurrencies into mainstream financial products in the country but also offer UK investors a regulated, transparent and efficient means to invest in bitcoin.