HMRC's Tax Noose and FCA's Deregulation Create Crypto ETN Paradox

The UK's regulatory landscape for crypto exchange-traded notes (ETNs) has erupted into a contentious battle as investors face a looming deadline to adjust their holdings. With the Financial Conduct Authority (FCA) recently lifting its retail ban on crypto ETNs, the market now grapples with HMRC's restrictive tax rules that effectively limit these products to a narrow segment of investment wrappers. Investors holding crypto ETNs in Stocks and Shares ISAs will be forced to sell their positions by April 2026, as HMRC has mandated that such products only qualify for the niche Innovative Finance ISA (IFISA) structure, according to an ETF Stream article. This shift has left platforms like AJ Bell, Nutmeg, and eToro scrambling to either redeem client ETNs or migrate them to non-tax-advantaged accounts, the ETF Stream article said.

The regulatory pivot underscores HMRC's escalating scrutiny of crypto assets. While the FCA's decision to ease restrictions on crypto ETNs was hailed as a victory for retail investors, HMRC's parallel measures have created a paradox. The tax authority's stance confines crypto ETNs to IFISAs, a structure with limited adoption, effectively stifling retail access. This tension highlights a broader struggle between regulators to balance innovation and compliance. "The rule change is a direct response to HMRC's rigid stance," said one industry observer, noting that platforms lacking IFISA capabilities face operational hurdles, the ETF Stream article added.

Meanwhile, HMRC's broader crackdown on crypto tax evasion has intensified. The tax authority has sent nearly 65,000 warning letters to suspected non-compliant taxpayers in the 2024-25 tax year, signaling a shift from educational outreach to enforcement, according to a Yahoo Finance report. The Halloween deadline for paper tax returns—October 31—adds urgency for investors with crypto gains exceeding £3,000, who face capital gains tax rates of 10% or 20% depending on income levels, the report said. The deadline also serves as a prelude to 2026, when UK crypto exchanges will be legally required to share transaction data with HMRC, further tightening surveillance, the same report noted.

The industry is pushing for regulatory clarity. Some issuers, including BlackRock with its iShares Bitcoin ETP, are launching UK retail-focused crypto ETNs despite the uncertainty, the ETF Stream article observed. Advocates argue that allowing these products into Junior and Lifetime ISAs could broaden access, mirroring their current eligibility in junior SIPPs under certain conditions, the ETF Stream article said. However, HMRC's reluctance to adjust its position has left investors in a holding pattern, with platforms like Freetrade and Lightyear forced to devise contingency plans, according to the ETF Stream article.

The ripple effects extend beyond ETNs. Euronext's proposed pan-European ETF trading platform has drawn criticism for plans to centralize settlement through its Milan-based depository, raising concerns about increased costs and market fragmentation, the ETF Stream article reported. Meanwhile, Middlefield's conversion of a Canadian investment trust into an ETF—launched with $80 million in assets—exemplifies the industry's pivot toward structured products as traditional wrappers face scrutiny, the ETF Stream article added.

As the UK's regulatory framework tightens, the crypto ETN market remains at a crossroads. Investors must navigate a rapidly shifting landscape where tax compliance, product eligibility, and market infrastructure are in flux. With HMRC's enforcement agenda gaining momentum and the FCA's deregulation efforts constrained, the battle for crypto ETNs reflects a broader struggle to define the role of digital assets in traditional finance.