The UK Financial Conduct Authority has introduced a regulatory framework in consultation document CP26/17, proposing that UCITS and most non-UCITS retail funds may allocate up to 10% of their total assets to crypto exchange-traded notes. This initiative marks a significant shift in the integration of digital asset exposures within the regulated public fund system, moving beyond the previous model where individual retail investors could only access crypto ETNs directly on exchanges. The core objective is to define the appropriate proportion of such instruments within diversified portfolios managed by licensed fund managers, imposing strict conditions that these assets must align with the fund's stated investment objectives and risk profiles.

Notably, the proposal explicitly maintains the prohibition on direct holdings of Bitcoin, Ethereum, and other native cryptocurrencies for investment purposes within these funds. The public consultation period for these regulations is scheduled to conclude on July 13, 2026.

This draft regulation establishes new investment channels with defined position limits for UK UCITS funds and non-UCITS retail funds, excluding specific exceptional products. The 10% cap, calculated against the fund's total assets, permits investment in tradable securities like crypto ETNs, positioning them as a secondary component rather than a core holding. Balanced multi-asset funds may incorporate crypto ETNs as a satellite position, a strategy typically involving a 5% to 20% allocation to highly volatile, niche assets to seek excess returns without altering the overall portfolio style. Data compiled by Woofun AI indicates that this approach allows for moderate exposure while maintaining the primary investment thesis of traditional retail portfolios. Funds focusing on traditional retail investments will remain subject to the existing regulatory framework, with crypto asset exposure strictly limited to ETN products under the 10% threshold.

The FCA has implemented a differentiated regulatory structure based on investor type and fund classification. Qualified investor funds targeting professional clients and mature investors are exempt from the 10% position limit applicable to retail funds. Conversely, Long-term asset funds (LTAFs) and non-UCITS retail funds operating as alternative investment fund portfolios are proposed to be completely prohibited from holding crypto ETNs, a restriction for which the regulator is currently seeking market feedback. This tiered approach reflects a strategy of moderately expanding investment channels through securities regulations while keeping the custody of native cryptocurrencies outside the scope of licensed fund portfolios. Woofun AI notes that this distinction underscores the regulator's intent to separate retail protection from professional risk tolerance, ensuring that high-volatility assets remain accessible only where appropriate risk management infrastructure exists.

This regulatory framework continues the policy direction established in 2025, when the FCA permitted retail investors to trade crypto ETNs on UK-compliant exchanges, a rule that took effect on October 8, 2025. Since then, crypto ETNs have become a standard category on British exchanges, with the London Stock Exchange providing trading services for over a year.

However, the regulator maintains that crypto ETNs are high-risk assets not covered by financial service compensation schemes, and the ban on crypto derivatives for ordinary investors remains in force. The authorities believe that current market infrastructure supports controlled expansion, yet the high-risk nature of the underlying assets necessitates clear warnings. Woofun AI analysis suggests that while the market maturity justifies this opening, the fundamental risk profile of the assets requires sustained vigilance from both regulators and fund managers.

For fund managers, utilizing ETNs to gain crypto exposure introduces additional compliance responsibilities beyond simple asset allocation. Managers must verify that listed crypto ETNs meet specific investment criteria, align with fund objectives, and satisfy liquidity levels and risk limits. The FCA mandates thorough due diligence on investment targets and continuous monitoring to ensure products remain compliant with operational strategies and liquidity standards. Crucially, managers must assess whether crypto assets and their associated ETNs can maintain sufficient liquidity under market stress conditions. This requirement transforms the investment decision from a purely financial calculation into a complex governance exercise involving ongoing risk assessment and operational oversight.

The 10% position limit serves as a primary risk control measure, but the practical usability of this permission hinges on supporting compliance efforts such as information disclosure and liquidity assessment. Licensed funds holding crypto ETNs must adhere to existing disclosure rules regarding investment objectives, strategies, marketing communications, and consumer obligations. If a fund's net value is expected to fluctuate significantly, UCITS managers must prominently highlight these risks in product materials. Managers planning to hold crypto ETNs must clearly explain the nature of their exposures in fund documents to ensure unambiguous product positioning. Even a small allocation exceeding a negligible proportion becomes a critical component of the investment strategy due to the distinct risk characteristics of crypto ETNs compared to traditional securities.

Furthermore, the FCA requires managers to evaluate crypto ETN holdings within the context of the entire portfolio, accounting for other high-risk assets, indirect crypto exposures through other funds, and assets linked to crypto prices, such as bonds issued by crypto companies. Consequently, the 10% limit does not cover all crypto-related risk exposures within a fund. For retail investors, the outcome is a more regular inclusion of crypto assets in mainstream portfolios, accompanied by rigorous disclosure and monitoring. The actual adoption of this regulation depends on whether asset managers, sales platforms, and custodians are willing to bear the costs of revising documents, enhancing internal governance, and conducting investor suitability reviews.

Two potential market trajectories emerge from this proposal. One scenario involves gradual, widespread adoption where asset management institutions utilize crypto ETNs as a small, diversified component, marking a substantial industry shift where mainstream public funds include crypto investments with adequate risk controls. The alternative scenario suggests the policy may hold only symbolic significance, with managers determining that the 10% limit, heavy disclosure requirements, liquidity concerns, and reputational risks outweigh the benefits. In this case, capital allocation would remain limited to a very small number of products. Ultimately, the proposal represents a step toward the gradual regularization of the crypto market system rather than complete liberalization, aiming to prevent crypto exposures from becoming the primary source of risk in retail portfolios. Following the comment period, British asset management institutions must decide whether to revise their prospectuses to utilize this 10% allocation or leave the policy as a symbolic opening.