Binance, the largest cryptocurrency exchange by volume, has attracted the attention of regulators for selling “stock tokens,” designed to track the performance of shares in crypto-friendly companies like newly listed Coinbase and Tesla, the Financial Times reports.
Red flags have already been raised by Hong Kong law firms regarding the two tokens launched earlier this month, which allow Binance customers to purchase as little as one-hundredth of a regular stock using Binance USD (BUSD), a U.S. dollar stablecoin issued by the exchange.
U.K. regulator the Financial Conduct Authority told the FT it is “working with the firm to understand the product, the regulations that may apply to it and how it is marketed.”
German regulator BaFIN did not confirm whether an investigation into Binance’s stock tokens was underway, but said if the “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 says the products are compliant with the European Union’s Mifid II markets rules and BaFin’s banking regulations and don’t require a prospectus because the tokens can only be bought and sold within the walled garden of CM-Equity, a regulated Munich-based investment group that processes the token trades.
Tesla and Coinbase token holders are indeed entitled to potential dividends, Binance said, but don’t confer any of the voting rights associated with regular securities.
Trading in securities is a heavily regulated business activity the world over. However, Binance CEO Changpeng Zhao has said he believes the exchange’s foray into stock tokens “demonstrates how we can democratize value transfer more seamlessly, reduce friction and costs to accessibility, without compromising on compliance or security.”
Meanwhile, Binance has been beefing up its regulatory clout with senior hires including Brian Brooks, former Office of the Comptroller of the Currency chief, to head Binance.US.