On Monday 11th March 24, the Financial Conduct Authority (FCA), announced they would ‘not object’ to issuers creating Bitcoin and Ethereum exchange traded products for professional investors.
The FCA’s decision clears the path for UK-based, recognised investment exchanges, including the London Stock Exchange and CBOE UK, to accept applications from issuers seeking to list exchange-traded notes. This approval is contingent upon meeting existing listing requirements and specific criteria, such as the mandatory use of custodians, which are, for example, subject to anti-money laundering rules in the UK.
First and foremost, this is another major developed market opening up institutional access to this digital asset class. We’ve seen the recent rapid success of the US Bitcoin Spot ETFs, with total Spot Bitcoin ETF AUM in excess of $56bn as at 20th March 2024.
Fundamentally, these products reduce the barriers to entry, and mitigate risks, for institutions looking to invest in digital assets. This can be compared to buying gold exchange traded funds instead of physical gold. Trading a gold ETF is more convenient and less cumbersome than purchasing gold, where you get the exposure to the commodity without the additional costs around storage and insurance for example.
Listed Digital Asset ETPs are subject to regulatory oversight, which provides investors with increased protection and transparency, compared to directly trading on largely unregulated cryptocurrency exchanges. Under listing requirements, they are also obliged to partner with reputable custodians like Zodia Custody, increasing benefits in the form of enhanced security, regulatory compliance, risk management, legal and fiduciary protection, as well as access to institutional services, all of which can result in enhanced confidence by investors who prioritise institutional grade services.
Why the FCA announcing this is a positive step forward for the UK
Ever since the privatisations of the 1980s, the UK, and more specifically the LSE, has been a symbol of the free market economy, with global giants such as Shell and HSBC deciding to list here. However, more recently, the UK has lost out on major IPOs and capital raising opportunities.
Having banned crypto-related derivatives, which included exchange traded products, back in 2021, the FCA has revisited the decision on a total ban, most likely following the success of the US spot ETF. Having watched the UK equity markets lose their top position as the place to take a firm public, it’s encouraging to see the FCA move towards ensuring the UK becomes a go-to place to list digital asset products, particularly given UK Prime Mister, Rishi Sunak’s references to how he seeks for the UK to become an institutional crypto hub.
ETNs vs ETFs – what’s in a name?
It is interesting to note that the FCA has stopped short of approving ETFs, opting instead to signal no-objection to ETNs.
While they both share many similarities – allowing investors to trade the underlying assets in a familiar, ‘securities like’ environment with transparency and liquidity – there are a couple of key differences that are worth highlighting:
- ETFs issuers have to buy and hold the underlying assets whereas ETNs are primarily debt instruments, akin to bonds, that do not need to be backed by underlying assets. This means that while ETNs can generally track the referenced underlying asset more closely, they carry higher counterparty risk.
- European ETFs are subject to UCITS minimum diversification requirement. ETNs are free of such requirement.
Why has the FCA gone down the ETN path?
An ETF will likely need to have an underlying basket of crypto assets to be compliant with the UCITS diversification requirement whereas an ETN can be a spot product. The UK regulator has been clear that any crypto ETNs (cETNs) will only be available to sophisticated institutional investors as it maintains it position on the inherent riskiness of crypto. When pitched at institutional investors the only assets for a spot ETN that are mature and liquid enough to be palatable are likely to be BTC and ETH which cleverly keeps the UK aligned with the US ETF landscape. The London Stock Exchange (LSE) has in fact expressly stated that any admissible ETNs will need to have BTC or ETH as underlying digital assets. The guidance from the LSE goes further and requires the ETNs to be physically backed (i.e. non-leveraged) which brings them even closer in structure to US spot ETFs, giving UK based issuers and investors a fantastic opportunity to benefit from this exciting asset class.
Choosing Zodia as your launch partner:
Whilst the news is still fresh, listed product issuers are currently strategizing on their go-to market plans. Arguably, one of the most important decisions that an issuer can make is selecting the right custody provider – this directly impacts the success of the product.
At Zodia we have a proven track record of delivering excellence as the trusted custodian for multiple ETP’s across Europe to a variety of tier 1 issuers. There are numerous reasons as to why multiple issuers have put their faith in Zodia and why we are extremely well positioned to lead as the primary custodian for UK ETP’s:
- Our custodial offering guarantees operational excellence allowing for efficient, compliant withdrawals in real-time from cold storage, eliminating the need for redemption batching.
- Evidenced robust and effective institutional grade controls providing bank-grade protection over the underlying crypto.
- Zodia goes above and beyond the strict requirements outlined by local regulators and exchange listing rules.
- Proactive and regulation-first approach in our service offering. Expertise and track record as a custodian of staked ETP products.
- We are more than just a custodial offering; we form strategic partnerships with issuers. Built by institutions, we utilise our heritage to widen distribution and attract institutional investors.
Every issuer is provided with a dedicated relationship manager who specialises in ETPs, familiar with the operational flows and there to support from product inception to assist with strategic planning and ensure that products are launched smoothly and quickly.
Choosing Zodia will help issuers fulfil the listing requirements!
Should you wish to discuss further, get in touch with us here.
