UK Regulator Considers Allowing Retail Funds to Hold Up to 10% in Crypto

The Financial Conduct Authority proposed permitting retail-oriented investment funds to hold limited cryptocurrency exposure, provided the strategy remains consistent with their stated and disclosed investment objectives.

The UK’s Financial Conduct Authority has put forward a proposal that would permit certain authorized investment funds to allocate up to 10% of their portfolios to crypto exchange-traded notes, narrowing the regulatory divide between retail investors and fund managers.

The FCA introduced the proposal in a quarterly consultation paper released on Friday, outlining a framework that would enable retail-oriented undertakings for collective investment in transferable securities (UCITS) funds, along with certain non-UCITS funds, to obtain exposure to cryptocurrencies.

The regulator said it aims to keep authorized funds aligned with evolving investor expectations while ensuring that consumers receive adequate protection and that financial markets continue to operate effectively.

The proposal aims to harmonize rules governing access to crypto-related products after the FCA removed its restriction on retail investors trading crypto exchange-traded notes in August, a move intended to bring the UK’s approach closer to that of other jurisdictions.

The FCA said in its consultation paper that the proposed 10% limit would impose cautious exposure thresholds on fund holdings while permitting those products to be offered and marketed to retail investors.

The regulator also stated that retail-focused funds should not be permitted to take on substantial exposure to crypto-related products, arguing that the highly speculative characteristics of the underlying digital assets make such allocations unsuitable for retail investors.

FCA Sets Investment Limits and Eligibility Rules for Crypto Funds Exposure

The FCA said retail investment funds seeking exposure to cryptocurrencies must demonstrate that such holdings align with the fund’s stated investment strategy and overall risk profile as disclosed to investors.

The proposal stated that unregulated funds and qualified investor schemes could allocate capital to higher-risk and more speculative assets without a prescribed holding limit, although these products cannot be marketed or offered to retail investors.

The FCA is also seeking feedback on whether funds focused on so-called “long-term assets,” such as property and other retail-oriented investment vehicles, should be barred from holding crypto exchange-traded notes, as it argues that cryptocurrencies are not aligned with those funds’ stated investment objectives.

The consultation period for the proposal has been set to run for five weeks and is scheduled to conclude on July 13.

The move comes as the UK continues to open pathways for the crypto sector, with both the FCA and the Bank of England currently consulting on proposed regulatory frameworks covering stablecoins, crypto custody, and staking services.

The Bank of England said last month that parts of its proposed stablecoin regulatory framework were being reconsidered after crypto firms warned that limits on holdings and reserve requirements could restrict adoption and market growth.

In April, new rules for tokenized funds were also introduced by the FCA to simplify the use of blockchain technology by asset managers, while feedback was sought on proposed guidance aimed at clarifying requirements for stablecoin issuance, crypto trading, custody, and staking services.