UK proposes retail funds may hold 10% in crypto ETNs

The Financial Conduct Authority has proposed that UCITS and some non‑UCITS retail investment funds be allowed to hold up to 10% of their assets in crypto exchange‑traded notes (ETNs). The regulator opened a five‑week consultation on the proposal, which closes on July 13.

The consultation paper states the cap aims to let authorised funds “remain contemporary and consistent with the demands of investors” while ensuring consumers “are adequately protected and markets function well.” The limit would apply only to funds that can be marketed to retail investors.

The 10% restriction is described in the paper as a conservative limit intended to balance retail access with investor protection. The FCA added it does not consider it appropriate for retail‑focused funds “to have significant exposure” to crypto products because of the speculative nature of the underlying cryptoassets.

Funds that wish to invest in crypto ETNs must show such holdings are consistent with the fund’s disclosed investment objectives and risk profile. The consultation seeks views on whether funds concentrated on long‑term assets, such as property, should be barred from holding crypto ETNs when such assets do not align with their stated objectives.

Unregulated and qualified investor schemes would not be subject to the 10% cap, but those vehicles cannot be marketed or sold to retail investors. The FCA says those schemes may invest in more speculative assets without a formal percentage limit, reflecting differences in investor type and marketing rules.

The proposal follows the FCA’s decision in August to lift a previous ban on retail trading of crypto ETNs. It comes amid work by the FCA and the Bank of England on proposed rules for stablecoins, crypto custody and staking. The Bank of England has said it is re‑examining parts of a proposed stablecoin regime after industry concerns about holding caps and reserve requirements and will publish a stablecoin draft in June

Earlier this year the FCA introduced new rules for tokenised funds to make it easier for asset managers to use blockchain technology and sought feedback on guidance for stablecoin issuance, crypto trading, custody and staking.

The consultation paper invites responses from industry and the public on scope, safeguards and permitted fund types. The FCA will use the feedback to decide whether to adopt the 10% cap and any additional restrictions or exclusions for specific fund categories.