Issuers will be allowed to offer exchange traded notes (ETNs) that reference certain types of cryptoassets to retail investors in the UK, under plans announced by the Financial Conduct Authority (FCA).
The FCA’s proposals, which are subject to consultation (89-page / 1.71MB PDF), seek to reverse a ban that has been in place since 2021.
ETNs are a form of debt instrument that closely track the performance of an underlying product or an index. Investors typically receive a return that reflects how well the underlying asset has performed in a specified period, minus any fees.
The FCA banned the sale of derivatives and ETNs referencing cryptoassets to retail consumers in 2021. It did so after expressing concern that retail consumers were unable to reliably assess the value and risks of derivatives or ETNs referencing cryptoassets due to: the nature of the underlying assets which have no inherent value; the prevalence of market abuse and financial crime in the secondary market for cryptoassets; extreme volatility in cryptoasset price movements; and the lack of a clear investment need for investment products referencing them.
Last year, it loosened those restrictions to allow ‘crypto ETNs’ (cETNs) to be sold to professional investors via UK recognised investment exchanges (UK RIEs). Now the FCA has said the market and regulatory framework has evolved sufficiently to enable it to lift the ban on the sale of cETNs to retail investors in a similar way.
Under the regulator’s proposals, the sale, marketing and distribution of cETNs would need to be conducted via UK RIEs and be subject to the FCA’s conduct of business and financial promotions rules, which require retail investors to be served a warning over the risks associated with the investment. Firms offering such investments would further be obliged to adhere to the consumer duty. Investments would not be protected under the Financial Services Compensation Scheme.
Igor Zyskind of Pinsent Masons, who advises on crypto-linked ETN programmes, said: “Issuers with existing listed cETNs on UK RIEs may need to consider supplementing their existing FCA approved prospectus or submitting a new prospectus to the FCA if there is an intention to distribute such cETNs to retail consumers.”
“It remains to be seen if there will be any additional rules by the LSE for admission to trading of cETNs that can be marketed to retail investors. Such rules, in particular, may restrict types of cryptoassets that can be tracked by cETNs and may provide for further restrictions,” he added.
The FCA said it plans to make the changes “as soon as possible”. The changes would take effect eight weeks after its final rules are made. The FCA’s ban on retail access to cryptoasset derivatives will remain in place.
David Geale, executive director of payments and digital finance at the FCA, said: “This consultation demonstrates our commitment to supporting the growth and competitiveness of the UK’s crypto industry. We want to rebalance our approach to risk and lifting the ban would allow people to make the choice on whether such a high-risk investment is right for them, given they could lose all their money.”
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