UK-based retail investors will be able to buy cryptocurrency exchange-traded notes (crypto ETNs) – with safeguards in place to ensure that products aren’t missold - following new rules from the Financial Conduct Authority (FCA) which come into play later this year.
Cryptocurrencies are popular among UK retail investors. Some of the top stocks on Interactive Investor’s platform over recent months have included Tesla and MicroStrategy, both of which hold Bitcoin on their balance sheet.
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But since January 2021, the FCA has banned the sale of crypto products – including crypto ETNs – to retail (AKA ‘DIY’ or individual) investors.
The decision “marks a pivotal moment in the broader integration of digital assets into the financial system”, said Dovile Silenskyte, director of digital assets research at WisdomTree.
What is a crypto ETN?
ETN stands for exchange-traded note. This is a type of financial instrument that trades on a stock exchange and gives investors exposure to cryptocurrency prices and their movements.
An ETN is a form of exchange-traded product (ETP). The best-known form of ETP is an exchange-traded fund (ETF), which is a fund that trades in real-time on a stock exchange.
Some investors might be familiar with exchange-traded commodities (ETCs). These act like ETFs but they track the price of an individual commodity; they can be used, for example, to invest in gold.
ETNs are similar to ETFs and ETCs but they typically track a more niche product or index, without requiring investors to directly hold the underlying securities.
Crypto ETNs are often described as physically-backed, as their market price is based on underlying crypto assets which the issuer holds.
While some investors won’t want to hold cryptocurrency through an ETN – there are risks associated with the structure, such as counterparty risk – they offer some advantages over buying cryptocurrency directly.
Unlike cryptocurrencies themselves, most ETNs can be bought and held in a stocks and shares ISA, meaning that they are more tax-efficient.
Additionally, some investors may be concerned about the security risks involved in setting up an account with a specialist cryptocurrency exchange. Coinbase, for example, was subject to a major security attack earlier this year.
“By accessing crypto through ETPs, retail investors can now engage with crypto in a safer, more transparent environment, in doing so reducing the risks of unregulated platforms,” said Silenskyte.
Should you buy a crypto ETN?
While investors will soon be able to buy crypto ETNs, it is another question entirely whether or not they should.
Cryptocurrencies are inherently volatile, making them a very high-risk investment. They are generally unsuitable for beginner investors, and any decision to invest in them should be made in consultation with a financial adviser.
ETNs in particular could expose investors to extra risks. While the Consumer Duty will apply to firms selling crypto ETNs to prevent their mis-sale, crypto ETNs won’t be subject to coverage from the Financial Services Compensation Scheme.
It is important, then, that investors understand the risks involved thoroughly before deciding to buy a crypto ETN.
But advocates think cryptocurrencies are an increasingly important part of the investing landscape and that the move will help investors understand the role they can play.
“These products make it easier for investors to evaluate and manage crypto within the context of their broader portfolios, in turn supporting more informed decision-making in pursuit of long-term investment goals,” said Silenskyte.
“While these products remain subject to the FCA’s mass market restriction, today’s move lays important groundwork for broader retail engagement under a regulatory framework."
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