UK FCA proposes 10% cap for funds investing in crypto ETNs

The UK’s Financial Conduct Authority (FCA) has proposed allowing authorized investment funds to allocate up to 10% of their assets to crypto exchange-traded notes (ETNs), according to a report from The Block. The proposal, which is currently open for consultation, targets public funds known as UCITS (Undertakings for Collective Investment in Transferable Securities) and most non-UCITS retail investment funds. If adopted, the regulation would mark a significant step in integrating digital assets into regulated retail investment products in the UK.

Background and regulatory context

The FCA has historically taken a cautious approach to crypto assets, banning the sale of crypto derivatives and ETNs to retail consumers in 2021 due to concerns about volatility, investor protection, and market integrity. This latest proposal signals a potential softening of that stance, but only for professionally managed funds that can assess and manage the associated risks. The 10% cap is designed to limit exposure while still allowing fund managers to participate in the growing digital asset market.

What this means for investors and the market

If the regulation is finalized, UK-based UCITS funds would be able to invest in crypto ETNs listed on recognized exchanges, such as those already trading in Europe and the US. This could provide retail investors with indirect exposure to cryptocurrencies through regulated, diversified fund structures, rather than requiring direct ownership of volatile digital assets. The move aligns with broader trends in Europe, where regulators in Germany, Switzerland, and the Netherlands have already permitted similar products.

Industry reaction and next steps

The FCA’s consultation period runs until early 2025, with final rules expected later in the year. Industry groups have broadly welcomed the proposal, noting that it provides a clear regulatory framework for fund managers. However, some consumer advocacy groups have expressed concerns about the suitability of crypto exposure for retail investors, even within capped fund structures. The FCA has emphasized that the proposal includes robust risk management requirements, including mandatory disclosure of crypto exposure and volatility warnings.

Conclusion

The FCA’s proposal represents a measured but notable evolution in UK crypto regulation. By allowing a limited allocation to crypto ETNs within regulated funds, the regulator is balancing innovation with investor protection. The outcome of the consultation will be closely watched by asset managers, crypto exchanges, and international regulators as a potential benchmark for similar policies elsewhere.

FAQs

Q1: What is a crypto ETN?
A crypto exchange-traded note (ETN) is a debt security that tracks the performance of a cryptocurrency or a basket of cryptocurrencies. Unlike ETFs, ETNs do not hold the underlying assets directly but promise to pay the return of the index they track.

Q2: Which funds would be affected by the FCA proposal?
The proposal covers UCITS funds (publicly offered retail funds) and most non-UCITS retail investment funds in the UK. It does not apply to professional or institutional funds that already have greater investment flexibility.

Q3: When could the new rules take effect?
The FCA is accepting comments until early 2025, with final rules expected later in the year. If approved, funds would need to update their investment mandates and risk disclosures before allocating to crypto ETNs.