UK Regulator Approves Crypto-Backed Exchange-Traded Notes for Professional Investors

In a significant move, the UK’s Financial Conduct Authority (FCA) has granted approval for the launch of crypto-backed exchange-traded notes (ETNs) designed exclusively for professional investors. This decision follows the regulator’s commitment to protecting retail investors by maintaining its ban on crypto ETNs and derivatives for this category of participants, deeming them “ill-suited” and potentially harmful.

The approved crypto-backed ETNs, which are bonds issued by financial institutions to mirror the performance of underlying assets, will be restricted to investment firms and credit institutions authorized to operate in financial markets. The FCA emphasized that the ban on retail access to these products remains intact.

In a separate statement, the London Stock Exchange announced its readiness to accept applications for the admission of bitcoin and ether ETNs starting in the second quarter of this year. The move by the FCA and the London Stock Exchange reflects a broader trend among regulators globally, acknowledging the growing influence of digital assets and attempting to balance market innovation with investor protection.

While the crypto market has experienced a surge in recent months, with Bitcoin reaching a record high above $72,000, regulators are cautious about potential risks associated with these assets. The FCA’s decision to limit crypto-backed ETNs to professional investors stems from a desire for these sophisticated market participants to evaluate the risk within their risk appetite with “greater insight and data from a longer period of trading history.”

The regulator reiterated its stance that the crypto market is “high risk and largely unregulated,” emphasizing the potential for investors to “lose all their money.” The FCA’s approach to crypto and retail investors is described as being in a “state of flux,” with an acknowledgment that regulatory considerations in this space are evolving.

The FCA is cautious about the possibility of retail investors accessing crypto through regulated financial instruments. The regulator seems to be navigating the delicate balance between fostering innovation and ensuring the protection of less sophisticated investors in the rapidly evolving crypto landscape.

As digital assets continue to gain prominence, regulatory authorities worldwide are grappling with the challenge of formulating comprehensive frameworks that promote responsible innovation while mitigating potential risks associated with the crypto market. The FCA’s move is seen as part of a broader effort to adapt to the changing financial landscape while upholding investor protection standards.

Digital Assets Desk