The UK’s Financial Conduct Authority said it will not oppose applications to create a market segment for ETNs backed by cryptocurrencies.

The London Stock Exchange (LSE) reported that it is going to start allowing and accepting applications for Bitcoin (BTC) and Ethereum (ETH) exchange-traded notes (ETNs) by the second quarter of 2024.

On Monday, March 11, the exchange reported that it would accept applications following the rules set out and specified in its Crypto ETN Admission Facts Prospectus. However, the London exchange did not specify the date on which it will start accepting applications.

In the prospectus, the exchange specified that crypto ETNs must have a physical backing and cannot be leveraged. They must have a publicly available market price or, where possible, a measure of value for the underlying asset, in addition to being backed by Bitcoin or Ethereum. 

Additionally, the exchange also highlighted that the underlying crypto assets must either be «wholly or primarily» held in a cold wallet. Furthermore, the assets must be managed by a custodian that is subject to anti-money laundering laws in either the UK, Europe or the United States.

What is an ETN?

The London Stock Exchange defines ETNs, as «debt securities that provide exposure to an underlying asset.» Crypto ETNs give investors the ability to trade securities that are linked to the performance of cryptocurrencies on the exchange’s trading day. 

An ETN is considered a flexible alternative to exchange-traded funds (ETFs). For example, unlike ETFs, which are pools of assets, an ETN is a debt instrument backed by its issuers. ETFs generally focus on esoteric debt strategies that are not easily adapted to funds.

The UK’s Financial Conduct Authority (FCA) also announced that it would not oppose the applications either

For its part, the UK’s Financial Conduct Authority (FCA) also announced that it would also not oppose applications from Recognized Investment Exchanges (RIEs) for the creation of a market segment for ETNs that are backed by cryptocurrencies. According to the FCA, exchanges can offer the products to professional investors along with credit institutions and investment firms regulated or authorized to operate in the markets.

The financial watchdog also encouraged exchanges to ensure that strict controls are in place to provide adequate protection for investors. 

The FCA added that cryptocurrency-backed ETNs must comply with UK listing regime requirements, including prospectuses and continuous disclosures. 

Although exchanges may offer ETNs to institutions, the Financial Conduct Authority noted that they are not ideal for retail investors due to their risks. It also added that the sale of cryptocurrency-backed ETNs to retail investors remains prohibited. «The FCA continues to remind people that cryptoassets are high risk and largely unregulated. Those who invest should be prepared to lose all their money,» the regulator reported.