FCA Opens Door to Crypto ETNs for UK Retail Investors

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In a landmark move, the UK’s Financial Conduct Authority (FCA) is to allow retail investors access to crypto exchange traded notes (cETNs).

The cETNs must be traded on a UK-based crypto exchange which is approved by the FCA. However, the FCA’s ban on cryptoasset derivatives will remain.

The move signals a significant policy reversal and a shift toward greater access to digital assets in the UK and has been welcomed by many.

This decision aims to support the growth and competitiveness of the UK’s crypto industry while aligning with global trends in regulated crypto investment products.

For retail investors, this opens new opportunities to gain exposure to cryptocurrencies like Bitcoin and Ethereum through regulated channels, such as stock exchanges, without having to go out and buy the underlying assets themselves.

What Are Crypto ETNs?

Crypto exchange-traded notes (cETNs) are debt instruments issued by financial institutions that track the performance of a cryptocurrency or a crypto index, such as Bitcoin or Ethereum.

Unlike exchange-traded funds (ETFs), which hold underlying assets, ETNs are unsecured debt securities that promise to deliver returns based on the asset’s price movements.

The FCA’s decision reverses a ban implemented in January 2021, which restricted cETNs and crypto derivatives to professional investors only due to concerns over volatility and consumer protection.

Unlike direct crypto purchases on offshore or unregulated platforms, cETNs are subject to FCA oversight, prospectus requirements, and transparency rules, reducing the risk of fraud or mismanagement.

Increased Investor Choice

The move expands investment options for UK retail investors, who have been locked out of regulated crypto products since 2020.

It also aligns the UK with countries like the US, Canada, and some EU member countries which have allowed retail access to crypto ETNs or ETFs for years. The US, for instance, approved Bitcoin ETFs in January 2024.

The FCA’s proposal helps the UK catch up, supporting its ambition to become a global crypto hub.

It also removes the need for individuals to buy cryptoassets themselves from cryptocurrency exchanges and navigate the technical challenges of storing them securely and managing wallets and seed phrases.

How can consumers access cETNs in the UK?

Retail investors in the UK can gain exposure to cETNs through FCA-regulated stock exchanges, such as the London Stock Exchange (LSE) or via investment platforms or brokerages.

Regulated platforms such as Hargreaves Lansdown, AJ Bell, Interactive Investor and others may allow consumers to buy these products alongside their traditional financial offerings.

What are the risk associated with cETNs?

The FCA has stressed that cETNs are high-risk investments, and investors could lose all their money due to crypto’s extreme volatility.

For example, while Bitcoin’s volatility has decreased from 130% annualized five years ago to 30% today, it remains far riskier than traditional assets.

Unlike other regulated investments, cETNs are not covered by the Financial Services Compensation Scheme (FSCS) or the Financial Ombudsman Service (FOS). If something goes wrong, investors have limited recourse.

Additionally, cETNs are complex products, and retail investors may not fully grasp the risks, including counterparty risk (dependence on the issuer’s solvency) or the impact of fees.

FCA move is welcomed

The FCA’s proposal has been met with enthusiasm from the crypto industry, with Kraken’s UK General Manager, Bivu Das, calling it a “major milestone”.

However, the FCA remains cautious and financial promotion rules will ensure firms avoid misleading ads or incentives.