UK FCA's proposals to reverse ban on sale of cryptoasset exchange-traded notes to UK retail investors

The UK Financial Conduct Authority (FCA) is consulting in CP25/16: Quarterly consultation paper No. 48 on proposals to lift its ban on the sale of crypto exchange-traded notes (cETNs) to retail investors. The change is likely to be effected before the end of 2025. This significant shift in the FCA's approach is likely to result in opportunities for retail investors, cryptoasset firms and fund managers and enhance the UK's global competitiveness through closer alignment with the approaches in the US and the EU. However, the strict requirements under the proposed framework create frictions that do not arise in other jurisdictions. It should also be noted that the FCA does not intend to lift the ban on sale of derivatives referencing cryptoassets to retail investors.

Background: What are cETNs and why did the FCA ban their sale to retail investors?

cETNs are a type of exchange-traded product (ETP) that reference a cryptoasset (e.g. Bitcoin) thereby giving its investors exposure to the cryptoasset it references, after deducting any applicable fees. cETNs are usually secured on the underlying assets that they reference, although this does not necessarily need to be the case.

The FCA originally announced in October 2020 its intention to ban the sale, marketing and distribution of cETNs and derivatives referencing cryptoassets to retail investors. The FCA considered that these products were “ill-suited” for retail consumers due to concerns over the potential for extreme volatility, market manipulation, lack of investor understanding and the high risk that retail investors could lose money through investment in these products. The ban has been in effect since January 2021.

How is the FCA's approach changing?

In CP25/16, the FCA proposes to lift the ban on cETNs (but not derivatives referencing cryptoassets) for retail investors, provided the product is, in summary:

• listed on a UK-based recognised investment exchange (UK RIE);
• marketed in compliance with financial promotion rules; and
• accompanied by clear risk disclosures.

Specifically, the FCA proposes that cETNs should be subject to Conduct of Business sourcebook (COBS) rules and related financial promotion rules, including marketing restrictions such as risk warning requirements and a restriction around offering any incentives to invest (for example, referral schemes or new joiner bonuses). The FCA considers that imposing appropriate marketing restrictions should ensure that retail consumers understand the relevant risks. The FCA proposes to:

• remove cETNs from the scope of the ban on marketing, sale or distribution to retail customers of certain products giving exposure to cryptoassets where these products are traded on a UK RIE (UK RIE cETNs);
• include UK RIE cETNs within the category of restricted mass market investments (RMMIs) to ensure application of the strict financial promotion rules for RMMIs under COBS 4.12A; and
• introduce a new bespoke risk summary for UK RIE cETNs and appropriate assessment considerations in COBS 10 to properly apply COBS 4.12A requirements on the promotion of RMMIs.

While including all UK RIE cETNs as RMMIs is consistent with the existing general rules applicable to financial promotions of cryptoassets in the UK, this position does not allow for any flexibility or for a nuanced approach to be taken for cETNs with different underlying cryptoassets or for which performance is linked to crypto indices, which may vary significantly in terms of their volatility and features.

For further details of the FCA's rules for cryptoasset promotions, including a compliance flowchart, see our previous briefing, The UK’s financial promotions regime: Bringing cryptoassets into the fold.

What are the drivers for the FCA's change of approach?

In CP25/16, the FCA notes that at the time of originally imposing the ban it committed to monitoring and assessing market and international regulatory developments. Factors driving the lifting of the ban include:

• Global competitiveness – lifting the ban will allow the UK to be more competitive in the face of the developments in crypto investment products in other jurisdictions including the US and the EU.
• Market evolution - the FCA acknowledges that the crypto market has evolved considerably since the ban was imposed, including evolution in custody arrangements, improvements in transparency and better investor education.
• Consumer demand – the FCA acknowledges that there is a strong retail interest in cryptoassets with consumers able to access unregulated or higher-risk cryptoasset- linked products, including through spot cryptoasset markets, leveraged ETPs and crypto proxy investments. Allowing retail access to UK RIE cETNs will provide those consumers with safer, more transparent access to cryptoasset products.
• Supporting innovation – the FCA views lifting the ban as part of a broader effort to support the growth of the UK’s crypto industry.

What are the implications for cryptoasset firms and fund managers in the UK?

Once the ban is lifted, relevant authorised firms operating in the UK will be able to market compliant cETNs to a retail audience.

There is scope for asset managers to innovate in their product offerings, to include cETNs and we may see more firms enter the space, encouraged by the FCA's pro-innovation approach.

However, firms should be aware that requirements under the financial promotions framework are stringent and difficult to put in place in practice and, depending on the marketing strategy, can require the inclusion of a series of cooling off periods.

Firms will need to ensure they are alert to the enforcement and reputational risks should they fail to comply with the applicable financial promotions and disclosures rules, including the restriction around incentives to invest.

It remains unclear at this point whether mainstream authorised retail funds, namely Undertakings for Collective Investments in Transferable Securities (UCITS) schemes and non-UCITS retail schemes (NURS) would be allowed to invest in cETNs.

What are the implications for retail investors?

The removal of the ban will allow more retail access to regulated crypto exposure (for example, within an ISA or a SIPP) without those investors needing to manage wallets or private keys. This may be beneficial for some investors in terms of taxation.

In CP25/16 the FCA emphasises that cETNs remain high-risk investments and that retail investors could lose all their money. Retail investors will however benefit from the safeguards the FCA plans to put in in place:

• through the requirements on risk warnings and disclosures, retail investors will be more aware of potential losses through, for example, volatility or exposure to issuer credit risk.
• firms will not be able to offer bonuses or referral schemes to promote ETNs.
• the FCA also proposes to continue to assess the market and to intervene if consumer harm is detected.

However, it should be noted that the FCA does not propose to extend Financial Services Compensation Scheme (FSCS) cover for UK consumers when investing in UK RIE cETNs. The FCA considers that there a risk that compensation for consumers who have chosen to engage in higher risk services or products may lead to poor incentives among consumers and firms and, additionally, there is also uncertainty on the risk to the wider market and potential exposure that could result for the FSCS from firm failures involved in the UK RIE cETN market.

How does the FCA's proposal compare with cETN rules in other jurisdictions?

While the proposals would bring closer alignment with the approaches in the US and the EU which broadly offer more flexibility to offer cETNs to retail investors, the FCA's proposals for the UK framework would still be more restrictive than in some jurisdictions.

The UK's financial promotions regime and, in particular, the rules around the promotions of RMMIs highlighted above, are particularly stringent. For "direct offer financial promotions" (in summary, those which specify a means of response to the promotion), additional requirements apply. These include the introduction of a 24-hour cooling-off period for first-time investors, personalised risk warnings, client categorisation requirements and appropriateness assessments.

In addition, it is not enough for cETNs to meet relevant offering requirements, for example, on disclosure with preparation of an approved prospectus. cETNs must also be listed on a UK RIE to be offered to UK retail investors. cETNs with an approved prospectus listed on a RIE outside of the UK will not benefit from the new rules.

What are the next steps and timing?

Comments are invited on the FCA's proposal until 7 July 2025. The FCA has stated that it will seek to make these changes "as soon as possible" and that it will implement the change from 8 weeks after the final rules are made. Authorised firms that have an interest in marketing cETN products should consider submitting comments to the FCA to help shape the final rules.