Cryptocurrency exchange Binance’s latest product – digital stock tokens representing fractions of stocks such as Tesla and Coinbase – is reportedly being studied by European and UK regulators for its potential non-compliance with securities laws.
A new report from the Financial Times alleges regulators are concerned that the tokens may not provide sufficiently transparent business information, particularly an investment prospectus, that would be required if the tokens were rated as securities. The German Federal Financial Supervisory Authority, or BaFin, told FT reporters that while it could not specifically comment on the matter:
“Fundamental […] The following applies: if tokens are transferable, can be traded on a crypto exchange and are equipped with economic rights such as dividends or cash payments, represent securities and are subject to the obligation to publish a prospectus. “
Binance’s stock tokens allow traders to buy as little as one-hundredth of a share, represented by a digital token, without having to buy it in full or have a physical share certificate. The product was developed together with the fully regulated Munich-based investment group CM-Equity AG, which also handles token transactions, and the Swiss-based asset tokenization platform Digital Assets AG.
In response to the regulators’ scrutiny, Binance told the FT that the tokens are an official CM-Equity product that complies with the European Union’s Mifid II market rules, as well as BaFin’s banking regulations. CM-Equity handles the custody of acquired shares, as well as the compliance and Know Your Customer rules for the product. Binance states:
“Currently, users only buy and sell the tokens from and to CM-Equity AG, which do not require a prospectus.”
Binance has also emphasized that share prices for the available tokens – in Tesla and Coinbase – are settled in Binance USD (BUSD), rather than fiat currency. Nor do they confer the same voting rights that traditional shareholders would be entitled to.
Binance’s stock tokens are more likely to track the stock performance of both companies and provide their holders with exposure to the potential dividends that come with full, traditional share ownership. “Each digital token represents one share of the stock and is fully backed by a custodial portfolio of underlying securities representing the outstanding tokens,” Binance outlined at the launch of the product.
The report highlights that regulators are concerned that the one-page service agreement and key risk documents provided to token investors would not meet compliance requirements if the stock tokens were considered securities. Experts have further pointed to the ambiguity as to whether Binance itself presents the tokens as securities or derivatives. Thomas Tüllmann, a partner at Hamburg-based law firm Eversheds Sutherland, said:
“It is simply inconsistent with the information from Binance […] If I were BaFin I would write to them immediately and ask where the prospectus is. “