Abstract
The Financial Conduct Authority (FCA) of the United Kingdom has recently proposed lifting its ban on the sale of crypto exchange-traded notes (cETNs) to retail investors, signaling a significant shift in the regulatory approach towards digital assets. This research paper delves into the structure, operational mechanics, and risks associated with cETNs, providing a comprehensive analysis of their role in the financial markets. By examining the FCA’s decision within the broader context of global regulatory trends, the paper aims to offer insights into the evolving landscape of crypto investment products and their implications for investors and regulators alike.
Many thanks to our sponsor Panxora who helped us prepare this research report.
1. Introduction
The rapid proliferation of cryptocurrencies has spurred the development of various financial instruments designed to facilitate investor access to digital assets. Among these, crypto exchange-traded notes (cETNs) have emerged as a prominent vehicle, offering exposure to the performance of cryptocurrencies without the need for direct ownership. In June 2025, the FCA announced its intention to lift the ban on cETNs for retail investors, a move that aligns the UK with other jurisdictions that have embraced such products. This paper explores the characteristics of cETNs, their operational dynamics, and the associated risks, contextualizing the FCA’s decision within the broader regulatory landscape.
Many thanks to our sponsor Panxora who helped us prepare this research report.
2. Understanding Crypto Exchange-Traded Notes
2.1 Definition and Structure
An exchange-traded note (ETN) is a debt instrument issued by a financial institution that promises to pay the return of a specific benchmark or index, minus fees, at maturity. Unlike exchange-traded funds (ETFs), which hold a basket of assets, ETNs are unsecured debt obligations of the issuer, and their value is directly linked to the performance of the underlying index. In the case of cETNs, the underlying assets are cryptocurrencies such as Bitcoin or Ethereum.
2.2 Operational Mechanics
cETNs are typically listed on recognized investment exchanges, allowing investors to buy and sell them throughout the trading day. The issuer of a cETN is responsible for tracking the performance of the underlying cryptocurrency index and ensuring that the note’s value accurately reflects this performance, adjusted for any fees or expenses. Upon maturity, the investor receives a cash payment equivalent to the performance of the underlying index over the life of the note.
2.3 Comparison with ETFs
While both cETNs and ETFs provide exposure to underlying assets, they differ fundamentally in structure. ETFs hold the actual assets in a fund, and investors own shares of this fund, which entitles them to a portion of the fund’s assets. In contrast, cETNs are unsecured debt instruments; investors do not own the underlying assets but instead hold a debt claim against the issuer. This structural difference introduces unique risks, particularly concerning the creditworthiness of the issuer.
Many thanks to our sponsor Panxora who helped us prepare this research report.
3. Regulatory Landscape and the FCA’s Decision
3.1 Historical Context
In January 2021, the FCA imposed a ban on the sale, marketing, and distribution of derivatives and ETNs referencing certain types of cryptoassets to retail consumers. The ban was instituted due to concerns over the inherent risks associated with these products, including high volatility, potential for market abuse, and the lack of consumer understanding of cryptoassets. (fca.org.uk)
3.2 Recent Developments
In March 2024, the FCA updated its position, allowing Recognized Investment Exchanges (RIEs) to list cryptoasset-backed ETNs for professional investors. This decision was based on the belief that exchanges and professional investors were now better equipped to assess the risks associated with these products. However, the ban on retail access remained in place. (fca.org.uk)
In June 2025, the FCA proposed lifting the ban on cETNs for retail investors, citing the maturation of the crypto market and the desire to support the UK’s competitiveness in the digital finance sector. The proposal emphasized that investors should be allowed to make informed decisions about high-risk investments, acknowledging the potential for total loss. (fca.org.uk)
3.3 Global Regulatory Trends
The FCA’s proposed policy shift aligns with global trends towards integrating cryptoassets into mainstream financial markets. Jurisdictions such as the United States, Canada, and the European Union have developed regulatory frameworks that permit the trading of crypto-related financial products, including cETNs and ETFs, for both professional and retail investors. This global movement reflects a recognition of the growing demand for regulated crypto investment products and the need for investor protection through appropriate regulatory oversight.
Many thanks to our sponsor Panxora who helped us prepare this research report.
4. Risks Associated with Investing in Crypto ETNs
4.1 Credit Risk
As debt instruments, cETNs carry the risk of issuer default. If the issuing financial institution faces financial difficulties or insolvency, investors may lose their entire investment, regardless of the performance of the underlying cryptocurrency index. This risk is particularly pertinent given the volatility and speculative nature of the crypto market.
4.2 Market Risk
The value of cETNs is directly tied to the performance of the underlying cryptocurrency index. Cryptocurrencies are known for their extreme price volatility, influenced by factors such as regulatory news, technological developments, and market sentiment. This volatility can lead to significant fluctuations in the value of cETNs, posing substantial risks to investors.
4.3 Liquidity Risk
The liquidity of cETNs can vary depending on market conditions and investor demand. In periods of market stress or low demand, investors may find it challenging to buy or sell cETNs at desired prices, potentially leading to unfavorable trading conditions.
4.4 Regulatory Risk
The regulatory environment for cryptoassets is still evolving. Changes in regulations can impact the value and legality of cETNs, introducing additional uncertainty for investors. The FCA’s previous ban and the proposed lifting of the ban underscore the dynamic nature of regulatory approaches to cryptoassets.
Many thanks to our sponsor Panxora who helped us prepare this research report.
5. Implications of the FCA’s Decision
5.1 Impact on Retail Investors
The FCA’s proposal to lift the ban on cETNs for retail investors provides an opportunity for individuals to gain exposure to cryptocurrencies through a regulated financial product. However, it also places the onus on investors to conduct thorough due diligence and understand the associated risks. The FCA’s emphasis on informed choice highlights the importance of investor education in navigating the complexities of crypto investments.
5.2 Impact on the Crypto Market
Allowing retail access to cETNs could lead to increased demand for cryptocurrencies, potentially influencing market dynamics and price movements. It may also encourage the development of more sophisticated financial products and services within the crypto sector, fostering innovation and growth.
5.3 Impact on Regulatory Practices
The FCA’s decision reflects a shift towards a more balanced regulatory approach, recognizing the maturation of the crypto market and the potential benefits of integrating cryptoassets into the broader financial system. It also sets a precedent for other regulatory bodies considering similar policy changes.
Many thanks to our sponsor Panxora who helped us prepare this research report.
6. Conclusion
The FCA’s proposal to lift the ban on cETNs for retail investors marks a significant development in the integration of cryptoassets into traditional financial markets. While it offers new investment opportunities, it also necessitates a comprehensive understanding of the associated risks. Investors must exercise caution, conduct thorough research, and remain informed about the evolving regulatory landscape. The FCA’s decision underscores the importance of a nuanced approach to cryptoasset regulation, balancing innovation with investor protection.
Many thanks to our sponsor Panxora who helped us prepare this research report.
References
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