FCA Grants Institutional Entry for Crypto-Backed ETNs

The London Stock Exchange is currently reviewing proposals for specific crypto investment products, aligning with updated guidance from the UK's Financial Conduct Authority (FCA).

In a recent notice, the exchange announced its intention to accept applications for exchange-traded notes (ETNs) linked to bitcoin and ether in the second quarter of this year. These ETNs, functioning as debt securities, aim to provide exposure to BTC and ETH. Investors can trade these securities, which track underlying crypto assets, on the exchange during London trading hours, akin to crypto ETFs in the US and other regions.

In a statement on Monday, the FCA expressed no objection to recognized investment exchanges establishing a market segment for such ETNs. However, this exclusive market segment will cater solely to professional investors, including authorized investment firms and regulated credit institutions operating in financial markets. The regulator emphasizes that exchanges must ensure sufficient controls for orderly trading and proper protection for professional investors.

It is noteworthy that the UK regulator had previously enforced a ban on the sale, marketing, and distribution of crypto-focused derivatives and ETNs to retail consumers in January 2021. This ban remains effective for that specific segment of investors, as clarified by the FCA.

Acknowledging the FCA's guidance on crypto assets, the London Stock Exchange noted in a crypto ETN admission factsheet that allowing these products to trade could potentially harm the exchange's reputation. Consequently, proposed bitcoin and ether ETNs are mandated to be physically backed, with the underlying crypto assets primarily held in cold storage. In cases where such storage is unavailable, issuers must obtain third-party audit reports and secure regulated custodians.

The London Stock Exchange explains that, given the nature of these products and the admission guidance provided, standard admission timelines will not apply to crypto ETNs. Issuers and their advisors are encouraged to coordinate with the Exchange at the earliest opportunity to discuss their proposed admission.

The London Stock Exchange also confirmed that it will entertain applications for bitcoin (BTC) and ether (ETH) ETNs in the second quarter of this year. Conversely, while the US Securities and Exchange Commission approved physically backed bitcoin ETFs in January, approval for spot ether funds is pending.

On the flip side, the FCA maintains its stance that the high-risk nature of crypto asset-backed ETNs and cryptocurrency derivatives is inappropriate for retail consumers, emphasizing the continuation of the ban on selling crypto ETNs to this segment; therefore, the ban for retail investors remains in effect.

Nevertheless, Bitcoin surpassed the $71,000 barrier, and ether crossed $4,000 on Monday following this news.