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“It’s just a slightly bungled process,” says Laura Suter of investment platform AJ Bell. “One of the main aims of Isas is that they are simple . . . [this] creates a lot of complication.”
Suter is perplexed by the government’s rollout of regulated crypto products. From next month, investors will lose the ability to hold crypto exchange-traded notes (ETNs) within stocks and shares Isas — a right only granted to them in October.
Instead they will only be allowed to hold them in a much more obscure tax wrapper called an Innovative Finance Isa.
While in theory this leaves the door open to Isa access, in practice it slams it shut. As the FT reported last month, no UK platform is currently authorised to sell both crypto ETNs and IF Isas — and it is understood that no major platforms are planning to launch one in the near future.
To give a sense of how obscure these vehicles are, while about 15mn Britons subscribed to an Isa in the 2023-24 tax year, only about 10,000 took out an IF Isa — and even that represented a 24 per cent decline on the previous year.
Suter says its difficult for investors to get their head around why these changes are happening.
And she’s not alone. A number of investment platforms have told the FT that they’ve been baffled by the decision to allow investors to hold crypto products in their tax-free wrapper, only for them to, in effect, withdraw it less than six months later.
“Reclassifying crypto ETNs so they are only eligible within an IF Isa reflects confused policy thinking,” one of the leading platforms said. The glaring problem, it added, is that IF Isas are typically offered by peer-to-peer lenders. Crypto ETNs are listed and traded; IF Isa managers are neither authorised nor operationally equipped to trade them.
The platform said the approach appeared to assume that stocks-and-shares Isa managers would enter the IF Isa market to accommodate the crypto products, despite having previously made a deliberate decision not to do so.
“The resulting operational challenges for firms — and avoidable confusion for consumers — are disproportionate to any intended policy objective,” they say.
The government’s view is that it does not mandate Isa managers to offer specific products, so whether IF Isa managers choose to offer crypto ETNs, or crypto ETN providers offer IF Isas, is a decision for them, not the government.
“Cryptoasset ETNs can be included in Innovative Finance Isas from April 6, encouraging greater investments and growing the economy. The government will also keep the ability to include ETNs in stocks-and-shares Isas in the future under review,” the government said.
Alex Campbell, head of external affairs at Freetrade, attributes the lack of appetite to muted consumer interest and the regulatory uncertainty created by a government that has delivered more than its share of U-turns.
“We have to make decisions about developing different products. If we make a decision to do one product it would mean not doing something else,” he says.
And given that the government has said it would keep the status of so-called crypto Isas “under review”, Campbell adds: “We could spend the next three-to-six months doing this, only for the government to say a little bit down the line, ‘oh, we’ll let you hold [crypto ETNs] in stocks-and-shares Isas’ [again].”
It might be different if customers were “jumping up and down saying we need to build this”. But they’re not.
So far uptake has been modest. WisdomTree, a leading issuer of these crypto products, said it had seen turnover of $100mn for its London-listed bitcoin ETN since access was opened to retail investors in October, and $59mn for its ether product.
The cooling of the UK government’s position on crypto comes just as some other European countries are warming up. The Luxembourg regulator, for example, recently opened the door to mainstream Ucits funds having up to 10 per cent exposure to crypto ETNs.
And while crypto investment products are far from everyone’s cup of tea, the closure of the Isa route will no doubt be frustrating for fans of digital tokens.
The innate volatility of crypto creates the potential for large gains that would be subject to significant capital gains tax if held outside a tax-free wrapper and subsequently sold — even if bitcoin’s 43 per cent nosedive in sterling terms since October might lead some to chuckle at this notion.
Which points to the bigger reason why platforms are not racing to set new innovative Isa vehicles, and why investors are not clamouring to get access to them: bitcoin — and crypto in general — looks like it’s going off the boil.
“It would be silly to write off crypto products entirely, but the combination of circumstances has meant that the limelight is firmly elsewhere,” says Chris Beauchamp, chief market analyst at IG, which does not sell crypto ETNs yet, but is planning to in the future. “It is hard for ‘digital gold’ to make headway when gold itself is doing so well.” The yellow metal is up 130 per cent in sterling terms over the past two years.
“With AI dominating so much of the conversation in markets, both for good and ill, there is a nagging sense that the caravan of attention has moved on from cryptocurrencies,” he says.
