Crypto ETNs in the UK: everything you need to know

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Crypto Exchange-Traded Notes (ETNs) are back on the menu for UK retail investors, four years after the products were banned from sale in 2021. UK regulator the Financial Conduct Authority (FCA) has reversed its position in the face of consumer demand and competitive pressure on London’s status as a global financial centre.

What are crypto ETNs?

Crypto ETNs are index-tracking products linked to a cryptocurrency, such as bitcoin or ether. The attraction for everyday UK investors is that crypto ETNs are subject to FCA regulation and will be tradable on the London Stock Exchange from a regular brokerage account. ETNs can even be held in ISAs and SIPPs providing their issuers comply with the rules on UK tax wrappers. As Exchange-Traded Products (ETPs), ETNs share some DNA with ETFs. However, ETNs are not governed by the UCITS rules and - when paired with cryptocurrencies - are considerably riskier than the average ETF, as we’ll see below.

Why were crypto ETNs banned?

The FCA prohibited the sale of crypto ETNs to ordinary investors in 2021, citing risks of extreme volatility, cyber crime, investor losses, and insufficient understanding of the products. Critics argued that ETNs were safer than pushing UK investors to unregulated crypto exchanges instead.

Why the change of heart?

Sentiment has shifted on crypto.

• Europe: Crypto ETPs have traded on European exchanges since 2015, gathering billions in assets.
• US: The first physical Bitcoin ETFs were launched in January 2024, accumulating massive inflows from institutional and retail investors alike.

Seven million UK adults owned crypto assets in 2024 according to FCA research. 93% of the population are aware of crypto, and a quarter would consider ownership if they could access regulated products. This high degree of familiarity and interest led the FCA to soften its approach on crypto, stating: “In light of this, we’re providing consumers with more choice, while ensuring there are protections in place. This should mean people get the information they need to assess whether the level of risk is right for them.” Ultimately, the FCA now judges that ETNs offer a more transparent route to crypto exposure versus the offshore exchange alternative.

How do crypto ETNs work?

Only crypto ETNs that track the market price of bitcoin or ethereum are available to UK retail investors for now. ETNs are actually debt securities. Like any debt, they are essentially a promise by the issuer to pay investors a return. In the case of a crypto ETN, that’s normally the return of an index linked to the market price of the underlying digital asset. Of course, crypto prices are extraordinarily volatile, so that return may be negative. The ETN product structure also means you do not personally own any crypto. You hold debt securities instead. Crypto ETNs are traded on the London Stock Exchange via your broker. These products must be physically backed by collateral. Where that collateral is held in crypto, at least 90 % must be kept in cold storage at any time. That is, the private keys that grant access to the crypto are stored offline. The collateral is held in reserve should the ETN issuer fail to meet their obligations to investors for any reason - such as being declared insolvent. However, there’s no guarantee that the available collateral will cover the full value of your holding. Like any crypto-linked investment, ETNs are extremely risky. If you’re tempted to invest then please read your candidate ETN’s prospectus. It will outline the unique risks of investing in a particular type of crypto, including potential devaluation of the underlying asset due to:

• Its cryptographic security being compromised by advances in computing.
• Changes to the rules governing the blockchain - with adverse consequences for some investors.
• Fraud perpetrated by bad actors gaining control of the blockchain.
• Negative changes to the regulatory or tax treatment of cryptocurrencies.
• An unexpected increase in the supply of the asset.

There are plenty of other risks besides, including the ever-present chance of cyber-theft of the underlying crypto. Again, you can read the full details in your ETN’s documentation but you should not invest any money that you are not prepared to lose.

How are crypto ETNs taxed in the UK?

Crypto ETNs are subject to capital gains on profits like any other investment. If your ETN is domiciled outside of the UK, then check it has reporting fund status. If it does not, then capital gains will be levied at your income tax rate instead of the lower capital gains tax rate. Capital gains tax is not payable if your ETN is held in an ISA or SIPP. As previously mentioned, issuers should be able to provide crypto ETNs that are compatible with your tax shelters. Income tax is only incurred if your crypto ETN pays income to you, and you don’t hold it in an ISA or SIPP. If your ETN does not pay income, then no income tax is due at all. Typically, ETNs are structured to not pay income, but you should check the issuer’s website for confirmation.

Why does anyone even care about crypto ETNs?

Currently, we’re experiencing a boom-time for crypto - especially bitcoin. For example, BTCE is one of Europe’s largest bitcoin ETNs. The product has gained an incredible 921% since launch in 2020. That’s 54.8 % annualised.

BTCE Performance

Of course, all cryptocurrencies are prone to violent crashes. BTCE suffered a hideous 73.6 % drawdown from November 2021 through 2022. Yet, crypto’s very volatility is key to its attraction. Bitcoin has repeatedly cycled through astonishing run-ups and routs. Hype and euphoria can cause the price to rocket. Only for confidence to crumble away just as quickly. Bitcoin has lost over 90 % of its value in the past and the price has collapsed several times during the notorious “Crypto Winters” when buyers flee the market.

Key questions to ask about crypto ETNs

Finally, ask yourself whether you really need crypto exposure at all. Nobody knows what the future holds for crypto or how to value it, which helps to explain the recurring boom-bust cycles. Consider whether you’re really prepared to lose your entire investment should the worst happen. The prospect of a 90 % price plunge or complete wipe out is very real. The bottom line The FCA’s reversal offers more convenient and better regulated access to crypto for UK investors. But regulated does not mean “safe.” For the crypto-curious, ETNs may soon provide a cleaner way to experiment. However, they remain a high-risk bet, not a must-have diversifier.