FCA to allow crypto backed securities: Opens Door to BTC and Ether-Backed ETNs

Introduction

The UK’s investment landscape appears poised for a digital transformation.

The Financial Conduct Authority (FCA), the UK’s financial watchdog, has signalled its readiness to permit the listing of certain crypto-backed securities, namely those connected to heavyweight digital currencies Bitcoin and Ether.

Beginning in April, issuers are invited to submit applications to the London Stock Exchange to list exchange traded notes (ETNs) linked to these cryptocurrencies.

What is an ETN?

 

ETNs are a type of unsecured debt security that tracks an underlying index of securities and trades on a major exchange.

 

ETNs are akin to bonds but do not pay periodic interest payments.

 

Instead, the return of an ETN is based on the performance of the underlying currency or index it represents.

Move represents a departure

 

This regulatory relaxation marks a stark departure from the FCA’s previously stringent stance on digital assets.

 

Amidst an international surge in cryptocurrency investments, the FCA’s move is a nod to the maturing market’s potential.

 

The announcement catalysed an immediate bullish response, propelling Bitcoin to a historic high of $72,000, while Ether soared to levels not seen since December 2021, touching $4,000.

 

The UK has lagged behind its peers in embracing crypto-related securities.

 

Despite governmental ambitions to mold the country into a dynamic hub for digital assets, the FCA’s 2021 ban on crypto-related derivatives, including exchange traded products, had cast a pall over these efforts.

 

The prohibition, stemming from concerns about excessive leverage offered to consumers by some platforms, was met with sharp critique from the crypto sector.

 

Critics argued that the ban stymied retail investors from accessing regulated pathways into prevalent cryptocurrencies.

 

With other major markets gradually warming up to crypto-linked securities within regulated frameworks, the FCA’s current decision reflects a harmonisation with the international trend.

 

The United States, several EU nations, Australia, Canada, and most recently Hong Kong, have all taken steps toward endorsing crypto-ETNs.

Not a free run, however

 

The FCA’s approval, however, comes with stipulations aimed at investor protection.

 

These securities cannot employ leverage; they must be securely stored offline and be under the custody of entities adhering to rigorous anti-money laundering regulations across the UK, EU, Jersey, the US, and Switzerland.

 

This move by the FCA is seen as a calibrated response to the growing body of data and insights garnered from a longer trading history of cryptocurrencies.

 

It suggests that the regulatory body is now confident that exchanges and professional investors are equipped to determine whether crypto-ETNs align with their risk profiles.

Conclusion

 

While the FCA maintains its stance that crypto derivatives are inappropriate for retail consumers due to inherent risks, the opening up of ETNs to professional investors is a significant stride in the UK’s crypto narrative.

 

It underscores the country’s initiative to balance innovation with investor protection, without curtailing the momentum of an evolving asset class that’s capturing global investor interest.

 

The anticipation is high as the UK gears up to witness a surge in ‘patriotic payments’ with the advent of this new era in crypto-securities, reflecting a broader commitment to the expansion and maturation of its financial services industry.

 

For more information and insights into this evolving policy and its impacts, stay tuned to our platform.