FCA revises stance regarding Exchange Traded Notes for professional investors involving cryptoassets

The Financial Conduct Authority (FCA) confirmed on 11 March 2024 it will not object to requests from Recognised Investment Exchanges (RIEs) to establish UK-listed market segments for cryptoasset-backed exchange-traded notes (cETNs).¹

The FCA has, however, stipulated that cETNs should only be reserved for professional investors, including authorised investment firms and regulated credit institutions operating in financial markets. Stringent controls will need to be maintained by RIEs to ensure orderly trading and provide adequate protection for professional investors, in accordance with the UK Listing Regime's requirements.

With improved market insight and data availability, the FCA believes exchanges and professional investors are now better equipped to evaluate the alignment of cETNs with their risk tolerance. Nevertheless, the FCA reiterates its stance that cETNs and crypto derivatives remain unsuitable for retail consumers due to inherent risks, maintaining the ban on their sale to this demographic.

Key points to consider:

• RIEs can apply for a UK-listed market segment for cETNs catering exclusively to professional investors. cETNs will only be accessible to professional investors due to an FCA ban on selling to retail consumers which took effect from January 2021: this remains in place as part of the FCA's conduct of business sourcebook (COBS) rules and would apply to any cETNs that are admitted to trading;²
• The London Stock Exchange (LSE) announced its intention to start accepting requests for certain kinds of Bitcoin and Ethereum ETNs in the second quarter of 2024. The LSE has published factsheet on the process for admitting cETNs for trading under segments specifically designated as 'Professional investors only".³ The designated trading segments are:
  • "ETPR - ETN - EUI - PROFESSIONAL INVESTORS ONLY – SETS"; and
  • "ECPR - ETN - ICSD - PROFESSIONAL INVESTORS ONLY".
• cETNs must meet stringent criteria including physical backing (i.e. non-leveraged), reliable market pricing that is publicly available; the underlying crypto-assets being must be held in 'cold storage' (i.e. offline depositary wallet) or equivalent; and issuers must adhere to custody and AML regulations. The LSE retains discretion to reject cETN admission applications despite meeting criteria;⁴
• The LSE says that early engagement is encouraged for issuers seeking cETN admission: standard admission timelines do not apply to cETNs. Issuers are advised to communicate with the LSE as soon as possible to discuss the proposed admission, and issuers should also engage in discussions with the FCA;
• Issuers can apply for up to three currency lines for cETNs, which can be applied for simultaneously with the main currency line or later; and
• A draft Static Data Form will need to be submitted to the LSE in line with specified lead times to ensure admission occurs on time. This is because the London Clearing House (LCH) requires extra time to establish and configure the necessary infrastructure and parameters to facilitate the clearing and settlement of securities transactions where numerous securities are scheduled to be admitted to the LSE's market at the same time.

Emphasising the high risks and lack of regulation surrounding cryptoassets, the FCA reiterates its active engagement with government bodies, international counterparts, and industry stakeholders to develop robust regulatory frameworks and set global standards for cryptoassets. The FCA's non-objection in relation to cETNs will be regarded internationally as a progressive move for the cryptoasset sector. Recent regulatory developments in UK cryptoasset regulation include the FCA's Discussion Paper on Stablecoins, which closed for responses on 6 February 2024. In addition, new rules for firms wishing to promote crypto products or services to UK consumers came into effect on 8 October 2023 and are aligned to those in place for high-risk investments.

_{1 https://www.fca.org.uk/news/statements/fca-updates-position-cryptoasset-exchange-traded-notes-professional-investors
2 COBS 22.6.5R, FCA Handbook.
3 https://docs.londonstockexchange.com/sites/default/files/documents/crypto_etn_admission_factsheet.pdf
4 Section 2, Part 1, Paragraph 2.5 of the Admission and Disclosure Standards}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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