EU and British Financial Watchdogs to Investigate Digital Stock Tokens

  • Richard Marley
  • April 23, 2021
  • 3 minutes read
  • 201

The German and British regulators are reportedly investigating the stock token trading, recently launched by Binance, to figure out if the tokens are compliant with the security regulation. 

Digital Stock Tokens is the latest product of the crypto exchange, Binance. This digital token represents the equity shares like Tesla and Coinbase and it is now being scrutinized by the concerned regulators about its security status. 

Financial Times reports that the regulators are concerned that the tokens are not providing transparency of the corporate disclosure, especially for an investment opportunity. Transparency would be required if the tokens are to be securities. 

Germany’s financial regulators, BaFin told, “Fundamentally […] 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.”

The stock tokens enable the traders to buy shares represented by digital tokens as little as one-hundredth of a share. This also allows traders to buy the shares without having to buy them in full or to hold a physical share certificate. 

Binance has responded after the investigation of the regulators that these tokens are an official CM-Equity product and it is compliant with the EU MiFID II regulations. Binance also ensures that the tokens are compliant with BaFin’s banking regulations. CM-Equity is responsible for acquired shares along with the Know Your Customer regulations. 

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

The exchange also highlighted that the prices of stocks for the tokens are settled in USD and not in fiat currency. This means the voting rights conferred are not the same as the traditional equity holders have. 

“Each digital token represents one share of equity stock and is fully backed by a depository portfolio of underlying securities that represents the outstanding tokens,” Binance outlined at the product’s launch.

The report emphasised that the regulators are still worried that only a one-page agreement and key risk documents that were given to token investors are not enough to satisfy the requirement of the compliance especially if the tokens are claimed to be securities. Some experts say that the information from Binance is inconsistent and BaFin should instantly ask the exchange about where the prospectus is.