Crypto Isas are here — but are they a good idea?

A couple of months ago, Paul Cavanagh received an early Christmas present. The 53-year-old caught wind that the UK government planned to give the green light for retail investors to hold cryptocurrency products in their Isas. What seemed to many an esoteric regulatory update was a coup for Cavanagh.

“I clocked it and thought: ‘Fantastic’,” says Cavanagh eagerly. “I even noted down the date it would come into place and set a diary reminder.”

For Cavanagh, this was a long time coming. The finance director for a chemicals company in the Midlands made his first foray into cryptocurrencies around a decade ago, when a tech savvy colleague persuaded him to hook some graphics cards up to a computer and start mining for the ethereum coin, a popular token for crypto fans. Since then, he has held cryptocurrencies on a variety of platforms, but the Isa had an obvious allure. “It’s tax-free gains,” he beams.

Cavanagh is not alone. To many in the sector, the announcement was the clearest and most significant signal yet that cryptocurrencies have been brought in from the cold by regulators. “This is a truly seminal moment,” says Russell Barlow, chief executive officer of 21Shares, the world’s largest provider of cryptocurrency exchange traded products. “The direction of travel is clear . . . Crypto is an emerging asset class and we’ll find that the regulators are getting more comfortable.”

It is also quite the volte-face from the Financial Conduct Authority (FCA), which five years ago imposed a ban on crypto derivatives to shield retail investors from its volatility. So what has changed in that time? Are these new products good for investors — and good for the economy? Should the UK government be providing tax incentives to these highly speculative assets?

In October, the government ruled that consumers will be able to hold cryptocurrency exchange traded products (ETPs) within Isas and pension schemes. Crypto exchange traded notes (ETNs), a type of ETP, track an underlying index and are traded on a regulated exchange that is supposed to make them more protected and less susceptible to fraud. 

The FCA estimates that around five million people hold crypto in the UK, down from seven million in 2024. For these users, the allure of putting such investments in an Isa is obvious: gains are exempt from income tax and capital gains. 

When we asked FT readers whether they intended to put these new crypto products into their Isa, many wrote in to tell us they would.

Anthony Merlo says he would have jumped at the chance to load up his Isa with cryptocurrency products — but had already used up his £20,000 tax free limit. “I was excited but pretty soon realised I couldn’t take advantage of it. It was a little frustrating,” he says. To use next tax year’s allowance on crypto products will require him to open an Innovative Finance Isa (more on this below), but he says that few providers offer this product.

Matthew Tagliani, head of Europe for ETF Product at Invesco, says there had been significant demand for investors to gain exposure to cryptocurrencies through their Isas — and not purely for tax reasons.

“Previously, if you wanted to buy crypto you have to do so through a totally different exchange, set up a wallet and go through a whole different process,” he says. “There is a certain segment of the investor community that just does not think that is worth it.”

Cavanagh agrees. A seasoned crypto investor, he holds some currencies on US-based platforms, such as Coinbase. “Some people might look at holding [crypto] and say, ‘well I don’t really want to set up a whole [new] account . . . if I have it through my normal Isa provider I will be more likely to use it.” 

And there are other benefits too. The crypto derivative products within the Isa will also have FCA approval and be listed on the London Stock Exchange, which brings with it more stringent rules over disclosures and marketing. FCA approval binds providers to the Consumer Duty rules, which force firms providing crypto ETNs to consider imposing risk filters and conveying risks appropriately to users, such as the fact that these investments will not be covered by the Financial Services Compensation Scheme.

The arrival of these products is a reversal for regulators, who historically erred on the side of crypto caution. Watchdogs, unnerved by the wild gyrations in the price of currencies and high fraud rates, sought to limit trading as much as possible to protect consumers. This consigned retail investors to trade on cryptocurrency exchanges unrecognised by the regulator.

In October 2020, as cryptocurrencies were soaring in price during a Covid era rally, the FCA announced a ban on the sale of cryptocurrency derivatives and exchange traded notes (ETNs). At the time the FCA said that price volatility, incidence of cyber crime and inadequate understanding of cryptoassets by retail investors all factored into the ban, which it estimated at the time would save consumers £53mn.

“This ban reflects how seriously we view the potential harm to retail consumers in these products,” said FCA official Sheldon Mills in 2020. “Significant price volatility, combined with the inherent difficulties of valuing cryptoassets reliably, places retail consumers at a high risk of suffering losses from trading crypto derivatives. We have evidence of this happening on a significant scale.’”

But as cryptocurrencies became more widely adopted and other jurisdictions such as the US started to regulate the assets in a more friendly way, the FCA started to relent. In March last year it finally allowed crypto ETNs to list on the London Stock Exchange, but initially only granted access to institutional investors. Currently, there are 17 crypto ETNs on the LSE, provided by the likes of 21Shares, Invesco and Fidelity.

In October, the FCA ban on retail investors was lifted, allowing consumers to buy bitcoin and other coins through regulated, exchange-listed products rather than solely crypto exchanges. The day after this came into effect, officials announced that such products could be held in Isas. Investors will also be able to include crypto ETNs in self-invested pension plans (Sipps), benefiting from tax relief on contributions at their marginal rate and investment growth within the plan.

“Since we restricted retail access to crypto ETNs, the market has evolved, and products have become more mainstream and better understood,” said Matthew Long, the FCA’s director of payments and digital assets, in a statement last year. “In light of this, we’re providing consumers with more choice, while ensuring there are protections in place.”

Jason Hollands, managing director at wealth manager Evelyn Partners, describes the rationale behind the shift: “They recognise that people are already accessing this stuff but in unregulated ways and therefore it’s better to try and bring it into the tent.”

While some investors are excited by the prospect of holding crypto products in their Isas, critics say the way the changes have been structured have left them cold.

Initially, crypto ETNs were made eligible to be held in traditional stocks-and-shares Isas. However, from April 6 this year, HM Revenue & Customs has said the new products can only be held in relatively obscure Innovative Finance Isas. These have historically been used by peer-to-peer lending platforms and are not provided by many mainstream platforms.

“The Innovative Finance Isa hasn’t been hugely successful in terms of uptake,” says Laith Khalaf, head of investment analysis at AJ Bell. “So it’s somewhat puzzling that the powers that be have decided this is the Isa where investors will have access to crypto ETPs — especially when they will be able to hold those same ETPs in regular Sipps and investment accounts.”

Hollands agrees, describing the decision to house the products in such niche vehicle as “strange”. He predicts that few mainstream providers would add an Innovative Finance Isa solely to accommodate those who want to hold crypto ETNs. He adds that crypto ETNs are also still classed as restricted mass market investments that require greater user warnings when offering them. “So even though you could in theory offer them within Isas, that status requires them to have very specific risk warnings and very specific descriptions on incentives offered.”

Others question the purpose of developing more crypto-friendly regulation. One fund manager told the FT that tax incentives as conferred through the Isa should not be handed out to assets that are as volatile and speculative as cryptocurrencies. The person added that these benefits should come from investing in productive assets in the UK — and these products could potentially cause harm to consumers.

It is part of a well-rehearsed debate. In recent years, the City has been torn over what the point of Isas is. Some have lobbied for more savings to be directed into the UK’s capital markets and other growth-enhancing measures, rather than cash. Others argue that Isas are about saving and encouraging people to save for the future, not necessarily boosting the UK economy.

Hollands says: “If you’re in that school of thought that the government tax incentives should be aimed at stuff that benefits the UK economy, then you might argue, ‘why would we do this for highly speculative assets that don’t actually invest in making it real or tangible’.”

But it’s an argument that has no truck with Barlow, whose business 21Shares was founded to make cryptocurrencies more accessible through ETNs. “‘Highly speculative’ and ‘volatile’ are descriptors that definitely apply to single equities but we don’t prevent them from being owned in Isas,” he says, comparing the volatility of crypto to smaller companies in the FTSE 350. “Think of crypto as the same as early-stage venture investing with potential high growth but also the possibility of higher volatility,” he adds.

Tagliani of Invesco rejects the idea that more friendly regulation encourages people to dabble in crypto. “It does not necessarily incentivise it. It puts it on a level playing field with other assets,” he says.

But others see a potential benefit in the prospect that the ruling will encourage younger investors who have started out trading crypto to look for other, more established, investments. 

Khalaf explains: “Many consumers already hold crypto and for those who have leapfrogged investing in shares to get straight to the really speculative end of proceedings, allowing them to invest in crypto ETNs in more mainstream brokerage accounts could mean they start to backfill their portfolio with more traditional assets.”

At least for now, crypto fans are happy at the scrapping of the ban — especially Cavanagh. In 2021, after the FCA ruling, he was forced to sell his ethereum coin, which has since increased in price by 90 per cent. “At the time I thought, ‘thanks very much, government; I appreciate that.’ You really did well looking after people there,” he grumbles.