The London Stock Exchange (LSE) has unveiled plans to accept applications for Bitcoin and Ethereum cryptocurrency exchange-traded notes (ETNs) in the second quarter of 2024, as announced on March 11. While the exchange confirmed its intention to proceed with the application process, it refrained from specifying an exact commencement date for accepting applications.
According to the exchange's cryptocurrency ETN admission fact sheet, these ETNs must adhere to certain guidelines. Notably, they should be physically backed and unlevered, with a publicly available market price or measure of value for the underlying asset, which must be Bitcoin or ether.
Emphasizing the security aspect, the exchange stipulates that the underlying crypto assets should be predominantly held in cold wallets or similar secure storage solutions. Furthermore, these assets must be held by a custodian subject to anti-money laundering laws in the UK, EU, Switzerland, or the US.
Defined as debt securities providing exposure to an underlying asset, ETNs enable investors to trade securities tracking the performance of crypto assets during exchange trading hours. While they are viewed as softer alternatives to exchange-traded funds (ETFs), ETNs differ in that they are debt instruments backed by an issuer rather than a pool of assets. This characteristic allows ETFs to focus on more complex debt strategies.
The UK's Financial Conduct Authority (FCA) has also weighed in on the matter, indicating that it will not oppose the establishment of a market segment for cryptocurrency-backed ETNs by Recognized Investment Exchanges (RIEs). However, the FCA underscores the importance of exchanges implementing robust controls to safeguard investors' interests, noting that cryptocurrency-backed ETNs must meet continuous disclosure and prospectus requirements.
Despite the opportunity for institutions to access ETNs, the FCA cautions against their suitability for retail investors due to associated risks. As such, the sale of cryptocurrency-backed ETNs to retail consumers will remain prohibited, with the FCA reiterating warnings about the high-risk and largely unregulated nature of crypto-assets, emphasizing the potential for investors to lose all their invested funds.
