Regulators to examine crypto exchange Binance’s foray into equities

Concerns over whether stock tokens comply with rules on transparency and corporate disclosures.

European regulators are examining whether Binance, one of the world’s biggest cryptocurrency exchanges, has complied with securities rules over its launch of trading in stock tokens.

In a new initiative that started last week, Binance says it allows users outside the US, China and Turkey to “trade equity shares through crypto coins”, with tokens that “represent a share in a stock corporation”. The move marked one of the most significant forays by a leading digital currency venue in to a specialised and heavily regulated market.

Changpeng Zhao, Binance’s chief executive, said that when the tokens launched they “demonstrate how we can democratise value transfer more seamlessly, reduce friction and costs to accessibility, without compromising on compliance or security”. But regulators are seeking to determine whether the tokens comply with rules governing transparency and corporate disclosures.

The UK’s Financial Conduct Authority said in a statement to the Financial Times that it is “working with the firm to understand the product, the regulations that may apply to it and how it is marketed”. It added that “firms and their senior management teams are responsible for determining whether their products and services fall within the remit of the FCA”.

German watchdog BaFin declined to comment on any potential inquiry into the stock token platform.“We cannot comment on the specific case due to confidentiality obligations,” the regulator said. “Fundamentally, however, 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 told the Financial Times that the stock tokens are a CM-Equity product that is compliant with the EU’s Mifid II markets rules and BaFin’s banking regulations. CM-Equity is a regulated Munich-based investment group that processes the token trades.“Currently users only buy and sell the tokens from and to CM-Equity AG, which does not require a prospectus,” Binance said. The Binance tokens are designed to track the share performance of companies they represent, but cost only a fraction of the price of the stock. Investors can trade tokens on Binance that shadow the price of two stocks: US-listed electric carmaker Tesla and rival crypto exchange Coinbase. Deals are backed by a “portfolio of underlying securities”.

Binance says users are also entitled to the “economic returns” of owning the shares, including potential dividends.Its just over one-page service agreement, and key risk documents for investors, indicate that CM-Equity is responsible for handling the services like custody for acquired shares, as well as compliance and know-your-customer checks.  
  
But the exchange does not provide a formal investment prospectus that would be required if it were deemed the stock tokens constituted “securities” under European regulations. CM-Equity said the product was Mifid II compliant and worked as a certificate for a total return swap.A prospectus was not necessary as the tokens were not transferable to other customers, it added, and are typically settled in Binance’s own cryptocurrency, rather than cash. The tokens do not confer the same voting rights that holders of an equity would receive, Binance said.

Lawyers say the regulatory status around the tokens is a grey area since Binance does not make clear on its website whether it is a security or a derivative. “Taken together with the information from Binance, it’s simply not consistent,” said Thomas Tüllmann, a partner at law firm Eversheds Sutherland in Hamburg. “If I was BaFin, I’d write immediately to them and ask where the prospectus is.

”German regulators have been open to developments in digital currency and equities markets, allowing exchange-traded products that track cryptocurrencies like Bitcoin on to Deutsche Börse.Zhao said in a recent interview with Bloomberg that the group is “very regulated”. It does not have a formal headquarters, but rather it has a “large number of regulated entities in multiple jurisdictions that we operate”. Binance claims to be the world’s biggest crypto exchange by volume, with around $47bn worth of coins trading on its platform in the 24 hours to Wednesday afternoon, according to CoinMarketCap.com.

That easily exceeded the turnover recorded by US-based Coinbase, which listed last week on Wall Street. It recently named former US senator Max Baucus as an “as adviser to Binance overseeing government relations and regulatory initiatives.” The group also announced on Tuesday that it hired Brian Brooks, a former official at the Office of the Comptroller of the Currency during the Trump administration, as chief executive of its American affiliate, Binance.US.

Binance’s marketing of security token based on Tesla stocks raises questions about Hong Kong licence

Binance, the largest cryptocurrency exchange by trading volume globally, is marketing its first security token backed by Tesla stocks trading on the Nasdaq exchange to investors – including those in Hong Kong.

The marketing campaign could be deemed a regulated activity that requires a licence in Hong Kong. Binance, however, does not have any such licence in the city, according to Securities and Futures Commission (SFC) records. Moreover, a list of restricted jurisdictions – mainland China and the United States among others -that bar trading in tokens on Binance’s website does not mention Hong Kong.

A spokeswoman for Binance based in South Korea said the exchange did not operate in the city, and offered no comment on any licensing. The launch of Binance’s security tokens comes amid a rise in the popularity of cryptocurrencies, whose combined market value surpassed US$2 trillion for the first time this month.

More mainstream banks, such as Morgan Stanley and DBS, have started offering clients exposure to cryptocurrency assets. Other cryptocurrency assets, such as security tokens, have also increasingly been attracting investors in recent years. The exchange, which sees an average daily trading volume of US$2 billion, started offering the security tokens on April 12. The announcement of the launch and links to its website were posted on various social-media platforms such as LinkedIn and Twitter.

The posting of an announcement that advertises a security token can be seen as an invitation or an advertisement, and could amount to “dealing” in securities, if it is intended to induce others to purchase or sell these “securities”, said Gaven Cheong, a partner at law firm. “The Securities and Futures Ordinance has made it clear that the issue of any advertisement, invitation or document, which contains an invitation to enter into an agreement to buy, or dispose of, any securities to the retail public could be an offence, unless such issue is authorised by the SFC,” he said.

Inducing members of the Hong Kong public to purchase securities is a regulated activity that requires a licence from the SFC, Cheong added. Binance, the largest cryptocurrency exchange by trading volume globally, is marketing its first security token backed by Tesla stocks trading on the Nasdaq exchange to investors – including those in Hong Kong. The marketing campaign could be deemed a regulated activity that requires a licence in Hong Kong. Binance, however, does not have any such licence in the city, according to Securities and Futures Commission (SFC) records.

Moreover, a list of restricted jurisdictions – mainland China and the United States among others - that bar trading in tokens on Binance’s website does not mention Hong Kong. A spokeswoman for Binance based in South Korea said the exchange did not operate in the city, and offered no comment on any licensing. The launch of Binance’s security tokens comes amid a rise in the popularity of cryptocurrencies, whose combined market value surpassed US$2 trillion for the first time this month.

More mainstream banks, such as Morgan Stanley and DBS, have started offering clients exposure to cryptocurrency assets.

What are cryptocurrencies?
Other cryptocurrency assets, such as security tokens, have also increasingly been attracting investors in recent years. The exchange, which sees an average daily trading volume of US$2 billion, started offering the security tokens on April 12. The announcement of the launch and links to its website were posted on various social-media platforms such as LinkedIn and Twitter.

The posting of an announcement that advertises a security token can be seen as an invitation or an advertisement, and could amount to “dealing” in securities, if it is intended to induce others to purchase or sell these “securities”, said Gaven Cheong, a partner at law firm “The Securities and Futures Ordinance has made it clear that the issue of any advertisement, invitation or document, which contains an invitation to enter into an agreement to buy, or dispose of, any securities to the retail public could be an offence, unless such issue is authorised by the SFC,” he said. Inducing members of the Hong Kong public to purchase securities is a regulated activity that requires a licence from the SFC, Cheong added.

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Unlike traditional equities that are traded in cash, these Tesla tokens can only be traded using BUSD, which is a stable coin pegged to the US dollar. But, on the flip side, the security token allows fractional trading and, in this case, one Tesla token can be traded at a minimum lot size of just 0.01 unit of the actual stock, or about US$7.18. While the Tesla tokens do not entitle their holders to voting rights, they do give holders the right to potential dividends and other economic benefits of the underlying stocks, Binance said on its website. The tokens’ price is pegged to that of the underlying stock, backed by the actual stock of Tesla. The Tesla shares are held in custody by a “third-party brokerage firm”.

The tokens are offered in partnership with CM-Equity, a German licensed asset manager, and Switzerland-based technology company Digital Assets. The token launch by Binance, which has users in 180 countries, also follows a mandatory regulatory framework proposed by the Financial Services and Treasury Bureau, which will require all cryptocurrency trading platforms to be licensed by the SFC. The proposed licensing regime will subject all virtual asset service providers to the city’s anti-money-laundering and counterterrorism financing scrutiny. The bureau has proposed to move a bill through the city’s legislature this year to finalise the framework.шаблоны для dle 11.2