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FCA Policy Shift on Crypto ETNs

Updated: Aug 21

1.0 Executive Summary


On 1 August 2025, the UK's Financial Conduct Authority (FCA) announced a significant policy reversal, permitting the sale of cryptoasset-backed Exchange Traded Notes (cETNs) to retail investors, effective 8 October 2025. This decision rescinds the prohibition established in January 2021. This report provides a technical analysis of the new regulatory framework, examines the structural characteristics and risks of these products, and assesses the operational and compliance implications for financial services firms. While this policy change signals a maturation of the UK's approach to digital assets, it introduces a complex and stringent regulatory environment for firms operating in this space.

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2.0 Regulatory Framework 


The FCA's decision is not an unregulated market opening but a carefully circumscribed framework designed to mitigate investor harm through robust oversight and placing a significant onus on product issuers and distributors.


2.1 Product Structure: ETN vs. ETF


A key technical distinction is that a cETN is a senior, unsecured debt instrument issued by a financial institution (the issuer). The ETN's returns are designed to track the performance of an underlying cryptoasset (e.g., Bitcoin, Ethereum). Unlike an Exchange Traded Fund (ETF), an ETN does not grant the holder ownership of the underlying assets. This structure introduces a significant risk factor:


  • Issuer Counterparty Risk: As ETNs are debt obligations, investors are exposed to the creditworthiness of the issuer. In the event of the issuer's insolvency, investors would become general creditors and could lose their entire principal investment, irrespective of the performance of the underlying cryptoasset. This risk is absent in a physically-backed ETF structure where the underlying assets are held in a segregated trust.


2.2 Mandate for Listing on Recognised Investment Exchange (RIE)


The stipulation that cETNs must be admitted to trading on a UK RIE (e.g., London Stock Exchange) is a cornerstone of the new framework. This imposes several layers of market integrity and oversight:


  • Orderly Markets: RIEs are required to maintain fair and orderly trading, ensuring robust price discovery mechanisms.

  • Transparency: The listing complies with pre- and post-trade transparency requirements, providing investors with access to reliable pricing and volume data.

  • Settlement and Clearing: Transactions are subject to the RIE's established clearing and settlement processes, reducing settlement risk.


2.3 Application of the Consumer Duty


The application of the Consumer Duty is the most significant compliance burden for firms. It compels firms to act to deliver good outcomes for retail clients, assessed against four key outcomes:


  1. Products and Services: Firms must design and distribute cETNs that meet the needs, characteristics, and objectives of a clearly defined target market. This requires rigorous product governance and stress testing.

  2. Price and Value: The price of the cETN must represent fair value to the consumer. Firms must assess the total cost of ownership, including management fees, trading spreads, and any other associated charges, against the benefits provided.

  3. Consumer Understanding: Firms must ensure their communications enable consumers to make informed decisions. This involves providing transparent, fair, and non-misleading information about the product's structure, risks (especially counterparty risk and volatility), and the explicit lack of FSCS protection.

  4. Consumer Support: Firms must provide a standard of support that meets consumers' needs throughout the product lifecycle, from onboarding to addressing potential complaints and resolving issues.


2.4 Lack of FSCS Protection


The FCA has been unequivocal that these investments will not be covered by the Financial Services Compensation Scheme (FSCS). This must be explicitly and prominently disclosed to all potential retail investors. The absence of a safety net places the full risk of loss—whether from market volatility or issuer failure—onto the consumer.


3.0 Implications for Financial Services Firms


3.1 Market Legitimation and Product Proliferation


This policy provides a regulated pathway for cryptoasset exposure, legitimising it as a component of the UK investment landscape. This is expected to spur product development from asset managers and create new revenue streams for exchanges and brokerage platforms.


3.2 Compliance and Operational Uplift


Firms must undertake a significant operational and compliance uplift to navigate this new regime:


  • Enhanced Due Diligence: Robust frameworks are required to assess both the underlying cryptoassets and the creditworthiness of the cETN issuers.

  • Suitability and Appropriateness: Existing frameworks must be recalibrated to account for the unique risks of cETNs. Execution-only platforms will need to strengthen their appropriateness tests to gatekeep access effectively.

  • Training: Client-facing and compliance staff will require comprehensive training on the technical nuances of cETNs and the specific requirements of the Consumer Duty.


3.3 Risk of Litigation


The high-risk nature of the underlying assets, combined with the stringent requirements of the Consumer Duty, creates a heightened risk of mis-selling litigation. Firms will need to maintain meticulous records of their product governance, target market analysis, and client communications to defend their actions.


4.0 Conclusion: A Calculated Regulatory Evolution


The FCA's decision represents a calculated evolution from a prohibitive to a regulatory-gated approach for retail crypto investment. By leveraging existing, robust frameworks—such as RIE oversight and the Consumer Duty—the regulator aims to balance innovation and market competitiveness with consumer protection. However, the policy transfers a significant degree of responsibility to the industry. The success of this initiative will depend on firms' ability to implement rigorous compliance controls and to communicate the substantial risks, particularly issuer counterparty risk and the lack of FSCS protection, with absolute clarity to retail investors.




 
 
 

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