European Regulators Eyeing Binance Over Stock Tokens

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In Brief
  • European regulators are looking into whether Binance stock tokens complying with securities rules.

  • Regulators are increasingly of the opinion that the stock tokens are securities.

  • Binance argues stock tokens don’t need a prospectus.

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European regulators are looking into whether Binance is complying with securities rules following the launch of its stock tokens.

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Last week, Binance began offering stock tokens, which are worth the equivalent amount of a company’s equity shares.

Initially launching with Tesla, Binance now also offers stock tokens for rival crypto exchange Coinbase’s shares.

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The tokens are available to users outside the United States, China, and Turkey. However, European regulators are now scrutinizing Binance to see whether these new offerings comply with securities regulations.

European regulator’s perspectives

Financial regulators in Europe are trying to determine if the tokens adhere to rules governing transparency and corporate disclosures.

The UK’s Financial Conduct Authority (FCA) said it is, “working with the firm to understand the product, the regulations that may apply to it and how it is marketed.”

However, the FCA also indicated that ultimately the responsibility lies with firms in determining if their products fall within the regulator’s purview.

Meanwhile, German regulator BaFin declined to comment specifically on Binance’s case, citing “confidentially obligations.”

However, it did say that they consider such tokens as securities, “if tokens are transferable, can be traded at a crypto exchange and are equipped with economic entitlements like dividends or cash settlements.”

As such, they assert that security offerings obligate firms to publish a prospectus.

Prospectus or not? Binance says no

According to Binance, a prospectus is not necessary because the tokens are not transferable to customers of other exchanges.

Also, users typically settle the tokens in Binance’s own stablecoin (BUSD), rather than cash. Additionally, Binance noted that the tokens do not confer the same voting rights that holders of equity would receive.

“Currently users only buy and sell the tokens from and to CM-Equity AG, which does not require a prospectus,” Binance explains.

It maintains that the stock tokens are a CM-Equity product, which are compliant with the EU’s Mifid II markets rules and BaFin’s banking regulations.

In the stock token service agreement and key-risk documents, Binance also highlights that CM-Equity is responsible for handling financial services.

These include custody of the acquired shares, as well as compliance and know-your-customer (KYC) checks. The Munich-based investment group claims the tokens work as a certificate for a total return swap.

However, some lawyers feel the regulatory status around the tokens is a grey area. They say that Binance does not make it clear whether stock tokens are a security or a derivative. 

“Taken together with the information from Binance, it’s simply not consistent,” said Thomas Tüllmann, a partner at Hamburg-based law firm Eversheds Sutherland. “If I was BaFin, I’d write immediately to them and ask where the prospectus is.”

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Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage. He can best be described as an optimistic center-left skeptic.

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