Evolution for Crypto Investment Products in the UK and US

James Ross
Aug 27
4 min read

Recent policy amendments by the United Kingdom's Financial Conduct Authority (FCA) and the United States' Securities and Exchange Commission (SEC) represent a paradigm shift in the regulatory treatment of crypto-assets. These developments indicate a move towards integrating digital asset investment vehicles into established financial frameworks, governed by principles of market integrity and investor protection. This report provides a technical analysis of these two regulatory actions and their material implications for financial market participants.

UK FCA: Rescission of Prohibition on Retail Access to cETNs

Summary of Regulatory Action

Effective October 8, 2025, the FCA will rescind its prohibition on the distribution of crypto-asset-backed Exchange Traded Notes (cETNs) to retail clients, a measure implemented initially in January 2021. The decision is predicated on the regulator's assessment of increased market maturity and product comprehension.

Access for retail investors is contingent upon adherence to a stringent regulatory framework:

Recognised Investment Exchanges (RIEs): cETNs must be listed and traded exclusively on UK-based RIEs, ensuring they operate under established market conduct and transparency rules.
The Consumer Duty: Firms are subject to the FCA's Consumer Duty, which requires them to act in a way that delivers good outcomes for retail customers. This includes ensuring products are fit for purpose, represent fair value, and are supported by clear communications that promote consumer understanding.
Exclusion from FSCS: The Financial Services Compensation Scheme (FSCS) does not cover these products, placing the onus of counterparty and market risk squarely on the investor.
Derivatives Prohibition: The prohibition on crypto-asset derivatives and futures for retail clients remains in force.

Implications for Market Participants

This policy adjustment creates a regulated, albeit circumscribed, channel for retail participation in crypto-asset markets.

Legitimisation within a Prescriptive Perimeter: By sanctioning access via a regulated ETN structure, the FCA formally recognises crypto-assets within the retail investment landscape. The RIE listing requirement establishes a clear regulatory perimeter, preventing the proliferation of unregulated offshore products.
Heightened Compliance and Litigation Risk: The application of the Consumer Duty imposes a substantial compliance burden. Firms must construct and document robust suitability and appropriateness frameworks. Failure to evidence that cETNs deliver good outcomes for clients creates significant exposure to regulatory sanctions and civil litigation for mis-selling.
Product Development and Advisory Opportunities: The decision enables UK-based asset managers and exchange operators to launch a new product category, creating novel revenue streams. For the wealth management and financial advisory sectors, it necessitates the rapid development of internal expertise, due diligence protocols, and risk-management frameworks to advise on this asset class without contravening their regulatory obligations.
International Regulatory Convergence: This action aligns the UK's regulatory posture more closely with that of other G7 nations, enhancing its competitiveness as a domicile for digital asset innovation and reinforcing its stated objective of becoming a global hub for crypto-assets.

US SEC: Authorisation of In-Kind Creations and Redemptions for Crypto ETPs

Summary of Regulatory Action

On July 29, 2025, the SEC authorised in-kind creations and redemptions for crypto-asset Exchange-Traded Products (ETPs), a significant departure from the "cash-create/redeem only" model imposed on the initial spot Bitcoin and Ether ETPs. This aligns the operational mechanics of crypto ETPs with those of traditional commodity-based ETPs.

The SEC's rationale centres on enhancing market efficiency and reducing transactional costs for investors. Concurrently, the Commission approved:

An ETP with a mixed portfolio of spot Bitcoin and Ether.
The listing and trading of exchange-traded options on spot Bitcoin ETPs.
A formal solicitation of public comment regarding the listing of ETPs based on additional large-capitalisation crypto-assets.

Implications for Market Participants

This technical adjustment to the ETP operational model has profound structural implications for the U.S. digital asset market.

For ETP Issuers and Sponsors: The in-kind model is superior from a cost and tax-efficiency standpoint. It allows Authorised Participants (APs) to exchange a basket of the underlying crypto-asset directly for ETP shares (and vice-versa), eliminating the trading spreads, fees, and potential price slippage inherent in cash-based transactions. This will directly translate to lower tracking error and reduced expense ratios. Furthermore, it mitigates the creation of taxable events for the fund, a significant advantage over the cash-create model.
For Market Makers and Authorised Participants (APs): The efficiency of the arbitrage mechanism—which maintains parity between the ETP's market price and its net asset value (NAV)—is dramatically improved. APs can now conduct arbitrage using their own inventory of the underlying crypto-asset, reducing operational friction and capital costs. This will result in tighter bid-ask spreads for the ETPs and deeper market liquidity.
Enhanced Institutional Confidence and Market Structure: By standardising the ETP structure, the SEC provides a powerful signal of regulatory clarity and treats the underlying assets as commodities. This will likely accelerate adoption among institutional investors who rely on these standardised, efficient market structures for hedging and portfolio allocation.
Precedent for Asset Class Expansion: The explicit consideration of ETPs for other crypto-assets establishes a clear regulatory pathway for expanding the universe of investable products beyond Bitcoin and Ether. The in-kind model ensures that inflows into these future ETPs will generate direct, structural demand for the underlying spot assets, deepUSntegrating them into the U.S. capital markets infrastructure.