The UK Financial Conduct Authority has proposed regulation that would allow some authorized investment funds to invest up to 10% of their portfolios in crypto exchange investment notes. The proposal aims to narrow the difference in rules between some funds open to retail investors and other investment vehicles.
Limited crypto access for retail funds
The regulation could allow collective investment entities that invest in transferable securities, known as UCITS, as well as some non-UCITS funds, to indirectly access crypto, according to a quarterly consultation paper published on Friday. The FCA stated that it wanted this step to contribute to keeping authorized funds up to date, while also being compatible with the protection of consumers and the healthy functioning of markets.
Mini dictionary: UCITS is an investment fund framework widely used in Europe and the UK, subject to strict risk, transparency and investor protection rules. Since funds with this structure can generally be offered to individual investors, regulatory limits are more clear.
The proposal comes after the FCA lifted a ban on retail investors accessing crypto ETN transactions in August. With this change, the institution aims to make the rules regarding who can purchase crypto products more consistent.
The FCA stressed that the proposed 10% limit would place a prudent constraint on the assets funds can be exposed to while allowing these funds to be marketed to retail investors.
Prudent limit and compliance requirement
The regulatory body also noted that due to the speculative nature of crypto assets, it does not find it appropriate for funds open to individual investors to focus on these products at a high level. For this reason, the proposed upper limit stands out as a controlled expansion rather than a wide-ranging liberalization.
It was stated that retail-focused funds wishing to invest in crypto will also have to demonstrate that this choice is compatible with the relevant fund’s stated investment objectives and risk profile. Thus, not only technical permission but also compliance with the fund structure will be one of the basic conditions.
Wider space in funds open to professional investors
The consultation text stated that unregulated funds and schemes for qualified investors could invest in more speculative assets. There is no specific holding limit for the funds in this group. However, it will not be possible to market or sell these products to individual investors.
The FCA is also seeking views on whether funds focused on long-term assets such as real estate and some other retail-focused funds should be prevented from holding crypto ETNs. The institution stated that it believes that crypto products are not compatible with the investment purposes of such funds.
Wider crypto regulatory agenda in the UK
The consultation process will last five weeks and end on July 13. The proposal comes as a more comprehensive regulatory framework for crypto assets is taking shape in the UK. The FCA and the Bank of England have recently been working on new rules in the areas of stablecoins, crypto custody services and staking.
The Bank of England said last month it was reassessing parts of its stablecoin regime after warnings from crypto companies that holding limits and reserve obligations could slow adoption. The FCA also published new rules on tokenized funds in April and took steps aimed at facilitating the use of blockchain by asset managers.
