The authors of this article examine recent moves by UK regulators to free up forms of crypto trading via what are called exchange-traded notes. The authors caution that in some ways the UK hasn't handled the area particularly well.

On 8 October, the UK financial regulator, the Financial Conduct Authority, lifted a ban on retail clients gainng access to crypto exchange-traded notes. The move is an example of watchdogs in major financial centres taking the crypto area in a more “mainstream” direction. (See here and here for examples.) Where is this going to lead and what should advisors to clients think? We carry this article from the law firm Withers. The authors are Harvey Knight (partner), Haider Farooq (associate) and Albie Bairamian (trainee). 

The editors are pleased to share these comments and invite responses – remember, these articles are to stimulate discussion. The usual caveats apply to views of guest writers. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com if you want to comment.

After years of regulatory caution, the FCA's decision to lift the ban on retail access to crypto exchange-traded notes (cETN) marks a watershed moment for the UK crypto industry. We examine the implications of this landmark shift for investors, brokers and the future of digital asset investment in the UK.

Historic approach
The UK has traditionally taken a cautious approach to cryptocurrency regulation:

-- 2021 ban on derivatives and ETNs: the FCA banned the sale, marketing and distribution of derivatives and ETNs that reference unregulated transferable crypto-assets to retail clients; and 
-- FTX collapse and calls for reform: the collapse of the FTX cryptocurrency exchange in 2022 prompted renewed focus on consumer protection and regulatory reform.

Growing confidence and increased consumer choice
Since 2021, certain crypto assets, notably bitcoin, have proven relatively reliable during periods of global economic uncertainty. An estimated 12 per cent of British adults now own cryptocurrency, up from 4 per cent in 2021. A survey by trading platform IG found that 30 per cent of adults were open to investing in crypto ETNs, rising to 50 per cent amongst 18 to 24 year olds.

Combined with increased institutional adoption and the US launch of spot bitcoin ETFs in 2024, the FCA recognised that the market has evolved and consumer choice should increase.

UK vs US: ETNs vs ETFs
Whilst the UK has embraced ETNs, the US took a different path with exchange-traded funds (ETFs). The SEC approved spot bitcoin ETFs in January 2024, followed by spot Ethereum ETFs later that year. 

The main difference is that ETFs physically own the underlying assets, whilst ETNs are unsecured debt securities that track the price of the index. UK retail investors should be aware that cETNs embed counterparty and issuer risk rather than true asset ownership. If the issuer fails, investors could lose their capital regardless of the underlying crypto's performance.

The current tax position
cETNs have initially been made available within Stocks & Shares ISAs, providing investors with tax-free access to crypto exposure through familiar account structures. For crypto investors, this represents an attractive opportunity as they are now able to diversify their investment portfolio to include exposure to cryptocurrencies alongside traditional holdings such as stocks. 

The looming IFISA reclassification 
However, cETNs purchased in Stocks & Shares ISAs will be reclassified as qualifying investments within the Innovative Finance ISA (IFISA) on 6 April 2026.

This reclassification raises several issues:

-- Limited platform support: most UK retail platforms don’t offer IFISAs and don't have plans to do so; 
-- Forced liquidation risk: if a platform doesn't support IFISA, investors will have 30 days to either sell their cETNs or transfer them to a taxable general investment account which could disrupt long-term investment strategies; and
-- Regulatory mismatch: the IFISA is designed for peer-to-peer lending rather than exchange-traded securities, making the reclassification confusing from a regulatory perspective. 

The reclassification creates a six-month window for investors to purchase cETNs in their regular ISAs before being forced into a wrapper that many platforms do not support. This regulatory disconnect between the FCA and HMRC threatens to undermine what could have been a significant tax advantage.

Implementation delays and broker responses
The rollout did not get off to a great start as investors faced a week's delay before gaining access to ETNs following the ban's lifting. This delay was symptomatic of the UK's approach to crypto and digital assets, attempting to engage without sufficient advance planning.

There has also been a mixed response from brokers. Major platforms such as Hargreaves Lansdown won't offer cETNs until 2026, whilst others have adopted extensive due diligence processes.

Looking ahead
Whilst the ban's lifting represents a step forward in principle, the execution has been problematic. The IFISA reclassification issue is particularly concerning, as it threatens to eliminate the potential tax advantages that could have made the UK market attractive.

Combined with implementation delays and major platforms declining to participate until 2026, the UK's competitive position appears weakened compared with jurisdictions with more streamlined regulatory frameworks.

The authors

Harvey Knight

Haider Farooq

Albie Bairamian