Key Takeaways
- US and Europe already allow retail investors to buy ETPs.
- Important shift in UK regulation driven by politicians.
- Investors may end up overallocating to crypto.
- Funds must be “physically backed.”
The UK Financial Conduct Authority has proposed lifting a four-year ban on retail investors buying exchange-traded products linked to cryptocurrencies. But there are already concerns that this regulatory green light could lead to speculative trading by new investors and legitimize a heavy weighting to a highly volatile asset class. There are also fears that the UK regulator may struggle to protect consumers and support financial innovation.
The move aims to boost Britain’s “cryptocurrency competitiveness” and better align the market with the United States, where crypto ETFs have increased in popularity under the Trump administration. It will also help the UK catch up with Europe, where the first bitcoin ETP launched nearly seven years ago.
“Permitting UK retail access to crypto ETPs could begin an important and timely shift in the regulatory landscape,” says Dovile Silenskyte, director of digital assets research at WisdomTree.
Following the debut of 21Shares and WisdomTree in late May 2024, currently there are about 30 crypto ETPs listed on the London Stock Exchange, all limited to professional investors who can prove via an online test that they have the experience and knowledge to deal in “complex financial instruments.” This is likely to change soon.
David Geale, executive director of payments and digital finance at the FCA, said: “This consultation demonstrates our commitment to supporting the growth and competitiveness of the UK’s crypto industry. We want to rebalance our approach to risk and lifting the ban would allow people to make the choice on whether such a high-risk investment is right for them, given they could lose all their money.”
The proposal will now go out for consultation. The FCA’s ban on retail access to crypto asset derivatives will remain in place.
Should Retail Investors Buy Crypto ETFs Anyway?
“We maintain a neutral stance on broader retail access to cryptocurrency in portfolios,” says Monika Calay, director of manager research at Morningstar UK.
“Our primary concern is that retail investors may not maintain long-term commitment to the asset class and instead engage in speculative trading while allocating disproportionate amounts of their portfolios to crypto.
“We support investors who wish to use small allocations for diversification purposes. However, we’re concerned about investors whose motivation resembles gambling or lottery-like thinking.
“We strongly discourage this type of short-term performance chasing, which unfortunately isn’t uncommon in the retail investment world.
“Bitcoin has experienced multiple drawdowns exceeding 40% over the past decade, positioning it at the high-risk end of the investment spectrum.
“Morningstar’s view is that a portfolio weighting of 5% or less appears prudent, and many investors may reasonably choose to avoid cryptocurrency entirely.
“For those who do invest, it should be with a long-term horizon of around 10 years, given the extreme volatility and uncertainty surrounding this asset class.”
WisdomTree’s Silenskyte also says investors may be in danger of dramatically overallocating to this new asset class.
“Should these products be accessible to retail investors in the near future, it’s important that they understand how these products fit within a diversified portfolio and what constitutes an appropriate allocation based on their risk profile.
“Our research reveals that 56% of UK retail investors believe that 10% or more is an appropriate allocation to the asset class. However, a 1% allocation within a diversified portfolio is enough to see meaningful benefits. As the market evolves, so must our commitment to helping investors make informed, responsible decisions.”
Europe Embraced Crypto ETPs Before the UK
In November 2018, the first physically backed cryptocurrency ETP was launched in Europe on the Swiss Stock Exchange—it was the 21Shares Crypto Basket ETP. For the first time, the product allowed private and institutional investors the opportunity to invest in cryptocurrencies without requiring additional infrastructure such as digital wallets. Since then, Sweden, Germany, France, and the Netherlands have decided to accept listings.
In Europe there are currently about 130 ETPs on cryptocurrencies listed on many European exchanges, including Euronext Paris, Euronext Amsterdam, Germany’s XETRA and SIX Swiss Exchange.
Of course, listings on Euronext exchanges enable more access points for investors domiciled in other European countries (like Italy or Spain) to trade crypto ETPs as is the case for single stocks listed on those exchanges, as long as a broker or trading platform offers the ability to do so.
Why Is the FCA Allowing Bitcoin ETPs Now?
While this development is the subject of consultation and technical input, few experts deny the role of politics in broadening investor access to cryptocurrency products.
The FCA has long been skeptical about cryptocurrencies. For many years it has been a critic of such products and the cryptocurrencies underlying them and has issued repeated warnings to potential investors about scams and total capital loss.
“The FCA has made clear that in its view cryptoassets have no intrinsic value and investors should therefore be prepared to lose all the value they have put in,” it said in a 2018 report on cryptoasset regulation.
So, what changed? Concerns about the competitiveness and performance of the UK economy have weighed on political sentiment in Whitehall, amid a broader push to reform the pension system to give savers greater access to private credit.
“It seems like this is part of a progression from ‘the FCA has no competitiveness objective’ to ‘the FCA has a secondary competitiveness objective’ to ‘the FCA responds to the government in January spelling out that ‘growth will be a cornerstone of our strategy,’” says Mike Barrett, consulting director at financial services marketing and analysis agency The Lang Cat.
“There’s a risk that the UK will be left behind in this area because other countries, including the EU, allow crypto ETNs. And it brings them within the financial promotion rules, so anyone getting involved will be subject to risk warnings, if not the Financial Services Compensation Scheme.”
Concerns remain, nevertheless, about consumer protection.
“The big question is whether this will actually drive UK economic growth in any meaningful way, or if it will just be beneficial to the firms that promote them,” Barrett says.
“As [Financial Inclusion Centre director] Mick McAteer has pointed out, there’s a difference between genuinely useful financial innovation and ‘the so-called financial innovation we see in finance, which is often spurious and toxic.’
“The FCA has a very fine line to balance between innovation and consumer protection.”
How Crypto Investors Can Stay Safe
Bradley Duke, managing director and head of Europe at Bitwise, says, “We welcome the decision by the FCA, as crypto ETPs are fully-backed MiFID 2 instruments traded on regulated exchanges.”
“Investors are receiving decades of regulatory protection when they trade ETPs including protections against market manipulation. Until the ban is lifted, retail investors seeking exposure to crypto have to buy on crypto exchanges which, while improving, do not have the same protections as large, established stock exchanges,” he says.
Duncan Moir, president at 21Shares says that this move aligns the UK with global financial hubs like the US and EU but “adopts a more cautious framework for retail participation.”
“The UK’s approach prioritizes sustainable market maturation over rapid growth,” he adds.
“Investors should recognize this as a legitimization milestone—not a guarantee of returns—and weigh ETNs against volatility, regulatory uncertainty, and the crypto cycle’s current phase.”
The FCA’s decision advances crypto’s integration into mainstream finance by bringing ETPs under regulated exchange oversight and enforcing transparency in marketing and disclosures. “However, the regulator balances innovation with risk mitigation, prohibiting complex derivatives and emphasizing retail education. This reflects a broader trend of acknowledging crypto as a high-risk asset class rather than a speculative toy,” says Moir.
Are US Crypto Spot ETFs and European Crypto ETPs the Same?
Bitcoin ETFs already existed in the US, but they did not invest directly in the cryptocurrency. Instead, they sought to replicate its performance through futures contracts (which is still banned for retail investors in the UK).
The approval of the first spot bitcoin ETFs in the United States in January 2024 was met with significant media attention, and the first few days of trading proved to be a success for providers. The world’s largest asset manager, BlackRock, announced that its iShares Bitcoin Trust IBIT attracted over $2 billion in inflows within just two weeks. The move also help boost the price of bitcoin, which then went on to breach $100,000 for the first time.
According to 21Shares’ Moir, the UK’s ETP rollout is “unlikely to replicate this momentum.”
This is due to two factors. First, market scale: “The UK’s investor base and liquidity pool are smaller, limiting initial demand,” says Moir. Moreover, regulatory guardrails are different. “The FCA mandates stringent risk disclosures and excludes government-backed safeguards, contrasting with the SEC’s ETF framework,” he adds.
US Spot ETFs and crypto ETPs are 100% physically backed by the underlying digital assets, which are kept in cold storage by an institutional-grade custodian. That means that the issuer holds real bitcoin instead of derivatives and each share investors buy represents actual bitcoin held by a custodian, typically a regulated institution that goes through a strict process. These are instruments that have a structure closely resembling that of exchange-traded commodities on physical gold.
The real difference is that in Europe ETFs are classified as mutual funds, and these must meet two fundamental criteria: the underlying assets must be financial instruments (securities), and mutual funds must invest in a diversified manner. An investment in a single asset is not allowed. These standards exist to protect investors, as they enhance the transparency of the product’s structure.
“As a result, cryptocurrencies do not fall under the ETF category in Europe, since they are not legally recognized as financial instruments, and investment in a single asset is not permitted,” says Bitwise’s Duke. Indeed, the same principle applies to gold and other commodities.
What Is an ETN? A Note on Fund Terms
The FCA’s statement on June 6 specifically mentions exchange-traded notes, with the headline “FCA to lift ban on crypto ETNs.” But what does that mean?
The acronym ETPs is an umbrella term for products structured as funds or notes that aim to replicate the performance of an underlying asset or benchmark. It acts as a blanket term for ETFs (exchange-traded funds), ETCs (exchange-traded commodities), and ETNs.
In the case of cryptocurrencies, the most widely used structure is ETNs. Technically, they are financial debt products without maturity issued by financial institutions that seek to match the return of a market index or a specific asset. ETNs may have a portfolio of assets given as collateral.
Cold Storage, Hot Wallets—Crypto Terms Explained
The London Stock Exchange said it would only consider “physically backed” bitcoin and ethereum ETNs with its assets “wholly or principally held in cold storage,” which is a safer method for storing cryptocurrency private keys offline.
In this way, cryptocurrency users and investors prevent theft by hackers who might gain control of their “hot wallets” via viruses, malware, ransomware, or other methods. If no such storage exists, the issuer will have to gain third-party audit reports and secure regulated custodians.
Investors also have to decide how to keep their crypto safe. There choices are to figure out the complexity of using hardware wallets or keep their crypto balances on exchanges in hot wallets, which is a crypto wallet always connected to the internet or another connected device. This is “not a great option” according to Bitwise’s Duke, who adds: “When retail investors trade crypto ETPs, they need to trade through regulated brokers.”
This article was written by Valerio Baselli and Ollie Smith. Additional reporting by James Gard.
