The UK Financial Conduct Authority (FCA) has announced that it will allow professional investors to trade crypto asset-backed exchange traded notes (cETNs). Following this, the London Stock Exchange has stated that it plans to accept applications for ETNs based on Bitcoin and Ethereum in the second quarter, further expanding investment opportunities in the cryptocurrency market.
In the context of the recent news about the UK accelerating cryptocurrency regulation, stablecoins and collateralization regulations are expected to be legislated within six months.
In addition, the UK has announced regulations for “digital securities sandbox,” which allows traditional securities to apply for tokenization starting from January next year.
Since the launch of the Bitcoin spot ETF in the US, it has attracted nearly $9.6 billion in funds and has reached an asset scale of $55.5 billion. The Economist recently acknowledged that with the introduction of ETFs, Bitcoin has become an investment asset.
In this context, the UK Financial Conduct Authority (FCA) has issued a press release today stating that it will not oppose requests from Recognized Investment Exchanges (RIEs) to create cETNs. However, these products will be specifically targeted at professional investors, such as authorized or regulated investment firms and credit institutions in the financial market, rather than retail investors.
There are differences between exchange-traded notes (ETNs) and exchange-traded funds (ETFs). ETNs are unsecured debt securities typically issued by banks, and their returns are related to the performance of their underlying index, but they do not actually own the assets. In contrast, ETFs are investment funds that directly invest in assets such as stocks, cryptocurrencies, or commodities, and provide returns based on the performance of these assets. Investors actually own a portion of the fund’s assets.
To apply for the inclusion of cETNs in the market, exchanges need to ensure sufficient control measures are taken to ensure orderly trading and provide adequate protection for professional investors. At the same time, cETNs must comply with all regulations of the UK listing regime, including but not limited to the publication of prospectuses and continuous information disclosure obligations.
Regarding restrictions on investor participation, the FCA believes that exchanges and professional investors should now be able to assess whether cETNs are suitable for their risk tolerance more effectively. However, considering the high risks and mostly unregulated nature of crypto assets, the FCA believes that these products are not suitable for retail investor participation.
Following this, the London Stock Exchange has announced that it will accept Bitcoin and Ethereum ETN applications in the second quarter of this year, with the specific launch date to be determined later.
According to the application guidelines issued by the exchange, the issuer must meet the following requirements for the proposed crypto ETNs: (a) they must be physically backed, i.e., non-leveraged; (b) the underlying market price or other value measurements must be reliable and publicly available; (c) Bitcoin or Ethereum must be used as the underlying crypto asset.
The underlying crypto assets must be (a) held primarily or entirely in “offline storage,” including offline collateralization; or (b) held by custodians regulated by anti-money laundering regulations in the UK, the European Union (or the European Economic Area where equivalent laws apply), Jersey, Switzerland, or the United States.
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