The United Kingdom is taking another step toward integrating digital assets into mainstream finance, with the Financial Conduct Authority (FCA) proposing new rules that would allow retail-focused investment funds to gain limited exposure to cryptocurrency products.

The proposal marks one of the clearest signals yet that UK regulators are becoming more comfortable with regulated crypto investments, while still maintaining strict safeguards designed to protect everyday investors from excessive risk.

FCA Proposes 10% Crypto Allocation Cap for Retail Funds

Under the proposal, authorized investment funds marketed to retail investors could be permitted to allocate up to 10% of their portfolios to crypto exchange-traded notes (ETNs).

The measure would primarily apply to Undertakings for Collective Investment in Transferable Securities (UCITS) funds, one of the most widely used investment structures across Europe, as well as certain non-UCITS retail funds.

The FCA outlined the proposal in its latest quarterly consultation paper, arguing that regulated investment products must continue evolving to reflect changing investor demand and the growing importance of digital assets within global financial markets.

The regulator stated that its objective is to ensure that UK investment funds remain “contemporary and consistent with investor expectations” while maintaining strong consumer protection standards and market integrity.

Closing the Gap Between Retail Investors and Funds

The proposal follows the FCA’s recent decision to relax restrictions on retail access to crypto-linked exchange-traded products.

In August, the regulator lifted its previous ban preventing retail investors from purchasing crypto exchange-traded notes directly, bringing the UK more in line with jurisdictions that have already embraced regulated crypto investment products.

However, a regulatory inconsistency remained.

Individual retail investors could gain exposure to crypto ETNs, but many regulated retail investment funds could not.

The new proposal aims to close that gap by allowing professional fund managers to include limited crypto exposure within diversified investment portfolios.

If approved, the change would create a more consistent framework across the UK’s investment landscape.

Why the FCA Is Limiting Exposure

Despite the move toward greater acceptance, the FCA remains cautious.

The proposed 10% cap is specifically designed to prevent excessive concentration in what regulators continue to classify as a highly speculative asset class.

According to the consultation paper, the limit represents a conservative approach that balances innovation with investor protection.

The FCA emphasized that it does not believe substantial crypto exposure is currently appropriate for retail-focused investment vehicles due to the volatility and uncertainty associated with digital assets.

By restricting allocations to a relatively small portion of a fund’s portfolio, regulators hope to provide investors with access to potential growth opportunities while limiting the impact of severe market downturns.

Investment Objectives Must Match Crypto Exposure

The regulator also made clear that crypto investments will not be permitted simply because a fund manager wants exposure.

Funds seeking to include crypto ETNs must demonstrate that the allocation aligns with:

• The fund’s stated investment objectives
• Its disclosed risk profile
• The expectations of investors
• The overall portfolio strategy

This requirement is intended to prevent inappropriate use of crypto assets in funds that are marketed as low-risk or conservative investment products.

Managers will need to justify how crypto exposure fits within the broader mandate of the fund.

Institutional and Professional Investors Face Fewer Restrictions

While retail-focused funds would face a strict 10% limit, the FCA is proposing a more flexible approach for sophisticated investment vehicles.

Professional investor funds, qualified investor schemes, and certain unregulated structures could potentially hold much larger crypto allocations without a formal cap.

The reasoning is straightforward: these products are designed for experienced investors who understand higher-risk assets and can absorb greater volatility.

However, such funds would remain unavailable to the general retail market.

This two-tier approach mirrors regulatory frameworks already used for alternative investments, private equity, hedge funds, and other higher-risk asset classes.

Questions Remain Around Long-Term Asset Funds

The FCA is also seeking industry feedback on whether some specialized investment vehicles should be prohibited from holding crypto entirely.

In particular, the regulator is examining whether funds focused on long-term assets—such as real estate, infrastructure, and private market investments—should be allowed to include crypto ETNs in their portfolios.

The FCA has suggested that cryptocurrencies may not align with the investment objectives of these structures, given their volatility and short-term price fluctuations.

Industry participants are expected to provide feedback during the consultation period.

Consultation Open Until July

The FCA has opened a five-week consultation window, which will remain active until July 13.

During this period, asset managers, financial institutions, industry groups, and investors will have the opportunity to submit comments and recommendations before any final rules are adopted.

The consultation is expected to generate significant interest as firms assess how the proposed framework could reshape crypto investment opportunities across the UK.

Part of a Broader UK Crypto Strategy

The proposal is not an isolated development.

Over the past year, the UK has accelerated efforts to establish itself as a leading hub for digital asset innovation while building a comprehensive regulatory framework around the sector.

Recent initiatives include:

• Proposed stablecoin regulations
• Crypto custody frameworks
• Staking guidelines
• Tokenized fund regulations
• Digital asset trading rules
• Blockchain infrastructure initiatives

The FCA and the Bank of England have both launched multiple consultations aimed at bringing greater regulatory clarity to the crypto industry.

Stablecoin Rules Also Under Review

The Bank of England is simultaneously reassessing parts of its proposed stablecoin regime following concerns from industry participants.

Crypto companies have argued that certain reserve requirements and holding limits could hinder adoption and reduce the competitiveness of UK-based stablecoin issuers.

As a result, regulators are reviewing whether adjustments are needed to support innovation while maintaining financial stability.

The willingness to revisit these rules has been interpreted by many industry observers as evidence that policymakers are increasingly focused on fostering growth rather than simply restricting risk.

Tokenization Gains Momentum

In April, the FCA also introduced new guidelines designed to support tokenized investment funds and make it easier for asset managers to utilize blockchain technology.

The regulator has increasingly recognized tokenization as one of the most promising applications of distributed ledger technology, particularly for improving efficiency, transparency, and settlement processes within traditional financial markets.

This broader embrace of blockchain infrastructure is helping position the UK as one of the more proactive jurisdictions in developing regulated digital asset markets.

A Significant Milestone for UK Crypto Adoption

If approved, the FCA’s proposal would represent another major milestone in the gradual integration of digital assets into mainstream investment portfolios.

Rather than treating crypto as a separate speculative market, regulators are increasingly exploring ways to incorporate it into traditional financial products under clearly defined risk controls.

The proposed 10% allocation limit reflects a cautious but notable shift in regulatory thinking: acknowledging growing investor demand for digital assets while ensuring that retail investors remain protected from excessive exposure.

As the consultation process unfolds, the outcome could play a key role in determining how quickly cryptocurrencies become part of the UK’s broader investment ecosystem and whether other global regulators choose to follow a similar path.