The Financial Conduct Authority (FCA) will now allow requests from recognised investment exchanges to develop a market segment for cryptocurrency-backed Exchange Traded Notes (cETNs).

According to the Journal of Banking and Finance, an ETN is generally structured as an exchange-traded, unsecured debit security where the principal is tied to a financial index.

The financial watchdog said that these products would only be available for professional investors that are authorised or regulated to operate in financial markets, like investment firms or credit institutions.

That means an existing ban on the sale of these products to retail consumers will remain in place, with the FCA saying that it believes crypto derivatives are still “ill-suited” to this market because of the risk they pose.

It went on to say that exchanges must ensure that sufficient controls are in place so that trading is “orderly” and protection is afforded to professional investors.

“With increased insight and data due to a longer period of trading history, the FCA believes exchanges and professional investors should now be able to better establish whether cETNs meet their risk appetite,” said the regulator.

The move comes as the authority continues its collaboration with government and industry to develop UK crypto regulation.

At the end of last year, the National Audit Office (NAO) criticised the FCA over a delay to force crypto asset firms to comply with AML regulation.

A new report by the watchdog examined how well placed the FCA was to respond to the changes being seen in the UK’s financial services sector such as in the rise of Buy Now, Pay Later and cryptocurrency.

The NAO noted that some change responses require parliamentary approval.

However, it observed “significant delays” over the FCA’s response to some issues, stating that even where the FCA does have power to act, moving to enforcement can take time.

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