Stock tokens make it possible to participate in the performance of companies. In terms of regulation, however, blockchain-based investment vehicles raise a number of questions. The Federal Financial Supervisory Authority (BaFin) wants to treat stock tokens like securities.
The wonderful world of tokenization has many facets. From tokenized gold to the colorful NFT landscape to the “human IPO”, the sector is bursting with innovations. A particularly obvious use case for tokens, however, is the digital representation of company shares (and other securities) on the blockchain. While the federal government is paving the way with the planned law for the introduction of electronic securities security tokens, stock tokens are enjoying growing popularity. In contrast to security tokens, stock tokens are not digitally securitized assets. Rather, they are synthetic assets that are linked to the price of a particular stock. Each stock token represents a whole share. Because tokens are divisible, the detour via stock tokens also allows proportional investments in the underlying shares. With stock tokens, investors do not acquire voting rights, but the prospect of participating in a rising share price and the distribution of dividends.
Exchange FTX is one of the better-known providers of stock tokens. The industry leader Binance now also has some stock tokens in its range. The latest addition is a token that tracks the price of Microsoft shares (MSFT). Given the proximity to the stock market, it is hardly surprising that stock tokens have now landed on the radar of financial market regulators in Europe.
Stock tokens on regulators’ radar
According to a report by the Financial Times piqued the interest of the UK Financial Conduct Authority (FCA). The FCA is currently in dialogue with Binance “to understand the product and the regulations that could apply to it, as well as the type of marketing”. She also made it clear that, in principle, “companies and their management are responsible for determining whether their products and services fall within the remit of the FCA”.
Meanwhile, the German market supervisors from BaFin were less willing to provide information. With reference to the duty of confidentiality, the authority could only elicit a general statement.
“If tokens are transferable, can be traded on a crypto-exchange and have economic claims such as dividends or cash settlement, they represent securities and are subject to the prospectus requirement.”
Now the stock tokens on Binance offer both cash settlement and dividend entitlement. Given this background, it seems likely that BaFin will take a closer look at the financial instrument – if it is not already at it. Nevertheless, a classification as a security is anything but set in stone.
BaFin-compliant thanks to the lack of transferability?
So refers Binance opposite FT ensure that investors trade the stock tokens exclusively with the German asset manager CM-Equity AG, which does not require a securities prospectus. The financial instruments are thus compliant with EU market law and the BaFin requirements for banking regulation.
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In fact, the BaFin explains in one Leaflet on initial coin offerings on the subject of prospectus requirements:
The transferability can be assumed to be given if the token (unchanged in its legal and / or technical content) can be transferred to other users. This is the case with the vast majority of token standards (e.g. ERC-20) that exist on the market.
Binance’s argumentation apparently aims to ensure that the tokens are not transferred directly from user to user, but are exclusively bought and sold by or to CM-Equity AG. This means that stock tokens might not meet the transferability requirement, as BaFin cites as a fundamental property of tokens that are subject to a prospectus.
BaFin warns of stock tokens
The German financial market watchdogs obviously do not share this view. In a consumer averaging announced the agency on April 28 raised “reasonable suspicion of missing prospectuses” in relation to Binance’s stock tokens.
BaFin has duly justified suspicions that Binance Deutschland GmbH & Co. KG in Germany may have published securities in the form of “share tokens” with the designations TSLA / BUSD, COIN / BUSD and MSTR / BUSD without the required prospectuses on the https website : //www.binance.com/de publicly offers.
Now the largest Bitcoin exchange in the world is facing a multi-million dollar fine.
A violation of the prospectus obligation constitutes an administrative offense according to § 24 Paragraph 3 No. 1 WpPG and can be punished with a fine of up to 5 million euros or 3 percent of the total turnover of the last financial year according to § 24 Paragraph 6 WpPG. Fines of up to twice the economic benefit derived from the infringement can also be imposed.
Meanwhile, Binance is willing to cooperate:
Binance takes its compliance obligations very seriously and is committed to following the requirements of local regulators wherever we operate. We will work with regulators to resolve any questions they may have,
a spokesman for the company told BTC-ECHO.
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