FCA Grants Green Light for Professional-Only Cryptoasset ETN Market Segment

March 11, 2024 - The UK's Financial Conduct Authority (FCA) issued a statement today saying it will "not object" to Recognised Investment Exchanges (RIEs) wishing to establish a dedicated market segment for cryptoasset-backed Exchange Traded Notes (cETNs), exclusively targeting professional investors, such as authorized investment firms and credit institutions. These exchanges must ensure robust controls for orderly trading and adequate investor protection within the UK Listing Regime's rigorous requirements.

With the evolving landscape and greater historical data, the FCA believes that exchanges and professional investors are now better equipped to assess cETNs in line with their risk profiles. However, the FCA reiterates its stance that cETNs and crypto derivatives are not suitable for retail consumers due to potential risks, maintaining the existing ban on sales to this group.

The FCA is still emphasising the high-risk nature of cryptoassets, advising that investments might lead to total loss, and continues its collaboration to shape the UK's regulatory framework and set global standards for cryptoassets. Applications for cETN listings on professional-only segments will be evaluated individually, ensuring strict adherence to the Listing Rules and investor protection measures.

The FCA said today that it continues to work with government to develop the UK’s approach to regulating cryptoassets. The FCA’s Discussion Paper on Stablecoins recently closed for input and from 8 October 2023, crypto firms wishing to promote their products or services to UK consumers must comply with the new financial promotion rules. The FCA continues to believe cETNs and crypto derivatives are ill-suited for retail consumers due to the harm they pose. As a result, the ban on the sale of cETNs (and crypto derivatives) to retail consumers remains in place.

In January 2020, the FCA introduced a ban on UK firms offering or selling crypto derivatives and ETNs that reference certain types of cryptoassets to UK retail consumers. This remains in place as part of the FCA’s conduct of business sourcebook (COBS) rules and would apply to any cETNs that are admitted to trading.

Over the past two years, the UK regulator has been actively involved in updating and refining its stance and regulations regarding cryptoassets to address the evolving landscape and the associated risks, especially for retail consumers. The FCA has emphasised the importance of clear, fair, and not misleading financial promotions, underlined by Principle 7 of the Principles for Businesses, which applies to both authorised and MLR registered persons involved in communicating financial promotions to professional investors. The FCA sees this principle as crucial in ensuring that financial promotions are presented in a manner that enables consumers to make informed decisions​​.

Additionally, the FCA has highlighted the need for due diligence in developing and reviewing cryptoasset financial promotions. Firms are expected to conduct thorough due diligence on the cryptoassets being promoted to verify any claims made and ensure that the promotions accurately represent the risks involved. This includes a comprehensive understanding of the cryptoasset, its operational and technological risks, and its legal and compliance implications. The FCA's guidance suggests that firms take into account various factors such as the clarity of communication, consumer understanding of risks, and the balance of information provided in the financial promotions​​.

The introduction of the Consumer Duty on 31 July 2023 marked a significant development in the regulatory landscape, imposing standards of consumer service across retail financial markets. This Duty emphasises that financial promotions must not only be fair, clear, and not misleading but also support customers' understanding and enable them to make informed decisions. This aligns with the FCA's stated ongoing commitment to protect consumers and enhance the integrity of the UK financial system​​.