UK FCA proposes 10% crypto ETN cap for retail UCITS funds in new consultation

The UK’s Financial Conduct Authority has proposed allowing some authorized investment funds to hold up to a 10% allocation of crypto exchange-traded notes, a move that would open limited retail access to digital asset products through regulated fund structures. The proposal appeared in the FCA’s quarterly consultation paper on Friday and would apply to retail-focused undertakings for collective investment in transferable securities, or UCITS funds, as well as some non-UCITS funds. The regulator said it wanted authorized funds to “remain contemporary and consistent with the demands of investors” while ensuring consumers “are adequately protected and markets function well.”

The consultation follows the FCA’s August decision to lift its ban on retail investors trading crypto exchange-traded notes, part of an effort to align UK retail access to crypto with other jurisdictions. The proposed 10% cap would “set conservative restrictions on assets to which a fund can be exposed, in exchange for allowing these funds to be marketed to retail consumers,” the FCA wrote. The regulator added that it did not believe allowing retail-focused funds “to have significant exposure” to crypto products was appropriate, “given the speculative nature of the underlying cryptoassets.” Funds seeking to invest in crypto must also show that the investment is “consistent with the disclosed investment objectives and risk profile of a given fund,” the FCA said.

Unregulated and qualified investor schemes, which cannot be marketed or sold to retail investors, could invest in “more speculative assets” and would not face the same holdings limit, according to the consultation. The FCA is also seeking input on whether funds centered on so-called “long-term assets” such as property and other retail-focused funds should be barred from holding crypto exchange-traded notes, arguing that crypto is not consistent with those funds’ investment objectives. The consultation is open for five weeks, until July 13.

The proposal comes as UK regulators have moved on several crypto fronts. The FCA and the Bank of England have been consulting on proposed rules for stablecoins, crypto custody and staking, and the Bank of England said last month it was reconsidering parts of its proposed stablecoin regime after crypto companies warned that holding caps and reserve requirements could hinder adoption. In April, the FCA introduced new rules for tokenized funds to make it easier for asset managers to use blockchains and sought feedback on guidance covering stablecoin issuance, crypto trading, custody and staking.