Regulatory clouds loom, German regulators "hit" Binance's stock token business

Germany’s financial regulator, BaFin, said in a notice on Wednesday that the stock tokens launched by cryptocurrency exchange Binance may have violated European securities regulations.

Binance tracks Tesla, Coinbase, and MicroStrategy’s stock tokens as being “suspicious,” with the announcement stating: “BaFin has reason to suspect that Binance Germany is selling shares in the form of ‘stock tokens’ without providing the required prospectus.”

Under Article 3(1) of the EU Prospectus, unless an exception applies, the conduct is an administrative offence punishable by a fine of up to €5 million ($6 million) or 3% of gross turnover in the previous financial year.

Binance, which claims to be one of the largest cryptocurrency exchanges by trading volume, launched its equity token business on April 12. The new service allows its users to buy a portion of a company’s stock using digital tokens, with the zero-commission tokens making holders eligible for returns including dividends.

This is not the first time that regulators have "knocked" on Binance's new business. Recently, Gaven Cheong, a partner at Simmons & Simmons law firm in Hong Kong, told the South China Morning Post that inducing the public to buy securities is a regulated activity that requires a license from the city's top financial regulator, the Securities and Futures Commission (SFC). The report said that Binance does not appear to have obtained a license to market or trade security tokens in the region.

BitPush reported last Thursday that the UK Financial Conduct Authority (FCA) is looking into whether Binance complied with regulatory rules before trading tokenized stocks and understood the product, possible applicable regulations, and marketing methods.

Binance told the Financial Times that Germany’s regulated CM-Equity Group handles services such as custody of the purchased shares, compliance and KYC checks. CM-Equity believes its product complies with Mifid II standards because it is an over-the-counter transaction and the tokens cannot be transferred to other customers like stocks.

CM-Equity also said that the product has been running for several months and has never received any objections or feedback from BaFin. A representative of the company said that it is considering taking legal action because the BaFin's ruling is "destructive."

As of now, the Binance Stock Token Trading Platform can still be accessed via Internet Protocol addresses in the UK and Germany, and Binance has not yet responded.