Cryptocurrency exchange Binance’s latest product — digital stock tokens representing fractions of equity shares like Tesla and Coinbase — is reportedly being studied by European and British regulators over its possible non-compliance with securities laws.
A new report from the Financial Times claims that regulators are concerned the tokens may not provide sufficiently transparent corporate disclosures, specifically an investment prospectus, that would be required if the tokens were judged to be securities. Germany’s Federal Financial Supervisory Authority, or BaFin, told FT reporters that while it could not comment on the case specifically:
“Fundamentally […] the following applies: if tokens are transferable, can be traded at a crypto exchange and are equipped with economic entitlements like dividends or cash settlements, they represent securities and are subject to the obligation to publish a prospectus.”
Binance’s stock tokens allow traders to purchase as little as one one-hundredth of a share, represented by a digital token, without having to purchase it in full nor to hold a physical share certificate. The product was developed together with the fully-regulated Munich-based investment group CM-Equity AG, which also processes the token trades, and the Switzerland-based asset tokenization platform Digital Assets AG.
In response to regulators’ scrutiny, Binance told the FT that the tokens are an official CM-Equity product that is compliant with the European Union’s Mifid II markets rules, as well as BaFin’s banking regulations. CM-Equity handles custody for acquired shares, as well as compliance and Know Your Customer rules for the product. Binance argues:
“Currently users only buy and sell the tokens from and to CM-Equity AG, which does not require a prospectus.”
Binance has also emphasized that stock prices for the tokens available — in Tesla and Coinbase — are settled in Binance USD (BUSD), rather than fiat currency. They also do not confer the same voting rights that traditional equity holders would be entitled to.
Rather, Binance’s stock tokens track the share performance of both firms and provide their holders with exposure to the potential dividends associated with full, traditional share owning. “Each digital token represents one share of equity stock and is fully backed by a depository portfolio of underlying securities that represents the outstanding tokens,” Binance outlined at the product’s launch.
The report highlights that regulators are concerned that the one-page service agreement and key risk documents provided to token investors would not satisfy compliance requirements were the stock tokens judged to themselves constitute securities. Experts have further pointed to the ambiguity over whether Binance itself presents the tokens as securities or derivatives. Thomas Tüllmann, a partner at the Hamburg-base law firm Eversheds Sutherland, said:
“Taken together with the information from Binance, it’s simply not consistent […] If I was BaFin, I’d write immediately to them and ask where the prospectus is.”