Binance’s latest product – digital tokens for stocks that represent stakes in the likes of Tesla and Coinbase – is said to be under study by European regulators and the UK for possible non-compliance with securities laws.
A new Financial Times report argues that regulators are concerned that the tokens may not provide sufficiently transparent disclosures about companies, especially the investment prospectus, which would be necessary if the tokens were considered securities. Germany’s Federal Financial Supervisory Authority, or BaFin, told the Financial Times reporters that while they could not comment specifically on the issue:
“Basically […] the following applies: If tokens can be transferred, they can be traded on the cryptocurrency exchange and provided with financial rights such as dividends or cash settlement, as they are securities and are required to publish the prospectus.”
Binance stock symbols allow traders to purchase at least one in a hundred of the shares that a digital symbol represents, without having to purchase them in full or obtain a physical share certificate. The product was jointly developed by the fully regulated investment group CM-Equity AG from Munich, which also deals with token trading, and the Swiss asset encoding platform Digital Assets AG.
In response to the regulatory audit, Binance told FT that the tokens are an official CM-Equity product that complies with EU MiFID II market rules as well as BaFin banking rules. CM-Equity is involved in storing purchased stocks, in addition to complying with rules and defining the rules for product use by your customers. Binance claims:
“Currently, users only buy and sell tokens from CM-Equity AG, which do not require a prospectus.”
Binance also stressed that the share price for the available tokens – in Tesla and Coinbase – is set at Binance USD (BUSD), not the fiat currency. It also does not provide the same voting rights as traditional shareholders.
Instead, Binance share tokens track the capital ratios of both companies and give their holders the opportunity to fully receive potential dividends associated with traditional shareholders. “Each digital token represents an ownership stake and is fully supported by a trustee’s portfolio of core securities that represent the issued tokens,” Binance explained upon product launch.
The report confirms that supervisors are concerned that the service agreement, on the one hand, and the most important risk documents presented to discerning investors will not be eligible if the share tokens are considered securities. Experts have also pointed to the ambiguity over whether Binance itself represents tokens as securities or derivatives. Thomas Thulman, partner at the Hamburg-based law firm Eversheds Sutherland, said:
“In combination with the information from Binance, it is simply incompatible […] If I were BaFin, I would write to them immediately and ask about the whereabouts of the potential customer.”