Pending UK Regulation Set To Offer Crypto Hedge Fund Industry Its Next Boon
The United Kingdom’s financial regulator the Financial Conduct Authority is currently in the process of analysing a plethora of applications from cryptoasset businesses looking to continue trading; the regulator is assessing applicant firm’s compliance with the UK’s Money Laundering Regulations.
The original January 9th deadline for firms to register with the FCA has passed, and a temporary regime has been established to permit firms who registered before the deadline, but whose status has not been confirmed, to continue trading until July 9th this year. On this date – providing the FCA doesn’t delay it again – the UK will have a list of regulator-approved firms with which UK-based clients will be able to do business.
The development is yet another in the ever-evolving digital asset industry and promises to eliminate one of the major hurdles facing UK-based investors that want exposure to crypto hedge funds; that of a lack of an acceptable regulatory regime which supervises the digital assets industry. Additionally, the UK’s approach when compared to that of Germany and Switzerland might stimulate competition, as opposed to block it.
“Jurisdictions like Malta and Gibraltar had some level of reputational challenges because of their association with gambling,” explained Konstantin Anissimov, CEO of London-based digital asset exchange CEX.IO, itself one of the firms awaiting the green light from the FCA. “And then, when Switzerland and Germany came into the space, that helped from a PR perspective, but you need a banking license to operate an authorised crypto investment operation in those countries, which is expensive and only really available to the big banks. The UK seems to be taking a more rounded approach, which will allow smaller companies to continue to operate and provide more competition, which should be for the betterment of the industry at large.”
Institutional investors looking to allocate to crypto hedge funds still have plenty of concerns, like how to mitigate the volatility, and whether it’s worth allocating to a crypto hedge fund at all when they can get long exposure to the main coins like Bitcoin and Ethereum very cheaply. For those that want to use an external manager, they will want to know that said manager is using a custody provider which ticks all the boxes.
“For hedge funds that keep their crypto assets on an exchange, they need to know that the exchange is secure, and the money is insured. For investors in those funds, they need to know that as well, and they need to feel comfortable that the policies and procedures around how the hedge fund safeguards their assets is up to scratch,” said Anissimov.
It’s not only the end investor that’s looking for some kind of regulated environment in which to operate. An approved regulatory regime will provide stability and reassurance to crypto hedge fund managers with regards to their service providers, which in turn will help them to secure larger allocations.
“Hedge fund managers want a trustworthy and reputable company that they can partner with – this will assist them with capital raising, not only operations and trading,” said Anissimov. “The tech is largely there in the sense of connectivity to major crypto exchanges, and the custody issue is one which is seeing increasing developments in terms of improved security and processes. But there are many investors who won’t touch crypto hedge funds because of the concerns around the regulatory framework that they operate in and consequently the current situation serves as a barrier to asset growth.”
There are 101 firms (as of March 19th 2021) which currently maintain a temporary registration with the FCA and not all of them will make the final cut. This might lead to digital asset M&A, however, as venture capitalists and founders scramble to salvage something of the remains of their businesses.
“It wouldn’t surprise me to see some M&A in the space when the FCA has made its decisions,” said Anissimov. “These companies will have customer bases which could be migrated to an authorised firm. What will be interesting is whether it’ll be a buyer’s or seller’s market; either there will be lots of buyers circling the non-authorised firms, which will push up prices, or not, which will depress prices. It’s difficult to tell which scenario will play out.”
These 101 firms will be waiting anxiously over the next three or four months to see whether they receive the green light or not. Regardless of how many end up with the FCA’s authorisation, it’s a positive step for the UK’s digital asset ecosystem.
“The only people who will lose are the companies which don’t receive the approvals,” said Anissimov. “Investors win because they get a list of service providers which are authorised by a top regulator in a hugely important financial centre. Hedge fund managers win because they will be able to use approved service providers which will better help them to support their clients. Overall, a regulated UK cryptoasset industry is a really encouraging step.”
© The Sortino Group Ltd
All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or scanning or otherwise, except under the terms of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency or other Reprographic Rights Organisation, without the written permission of the publisher. For more information about reprints from AlphaWeek, click here.