Bypassing US regulations, Binance crypto exchange restarts

# Source: Wall Street Insights

By Zhao Ying

Binance is exploring the re-launch of stock tokens on its exchange, while platforms including exchanges like Kraken and Bitget as well as decentralized protocols such as Jupiter have already made headway in the stock token space. Crypto exchanges are eager to roll out stock token products primarily because the cryptocurrency market is in the doldrums, whereas the share prices of US tech giants keep rising—exchanges are unwilling to see their clients’ idle funds flow into traditional stock markets.

Major global cryptocurrency exchanges are scrambling to launch crypto token products that track US stocks, building a parallel stock market outside the US regulatory framework. This trend allows overseas investors to trade US stocks bypassing the restrictions of traditional brokers, but it also raises concerns over market manipulation and regulatory arbitrage.

Citing sources familiar with the matter, *The Information* reported that Binance is exploring the re-launch of stock tokens on its platform, having suspended such offerings back in 2021 following a warning from German financial regulators. Haider Rafique, Global Managing Partner and Chief Marketing Officer of OKX, another leading global platform, stated that the company is also considering providing tokenized stocks. Exchanges like Kraken and Bitget, along with decentralized platforms such as Jupiter, have already made progress in the stock token sector.

Data from analytics platform RWA.xyz shows that the total value of all circulating tokenized stocks currently stands at $915 million, surging 19% from a month ago. Though still negligible compared to the roughly $60 trillion market capitalization of the S&P 500, this market is expanding at a rapid pace.

The New York Stock Exchange (NYSE) and Nasdaq are also planning to allow stock token trading. The NYSE said on Monday that it is developing a platform for trading stock tokens and will seek regulatory approval.

## A New Battlefield for Crypto Exchanges

Crypto exchanges are keen to offer stock token products mainly due to the sluggish cryptocurrency market coupled with the sustained rally in the share prices of US tech giants. Exchanges do not want their clients’ idle capital to move into traditional stock markets.

“Crypto users hold massive amounts of USDT in their accounts… They are looking for alternative financial assets outside the crypto industry,” said Gracy Chen, CEO of Bitget, a crypto exchange that started offering stock tokens in September last year.

Mark Greenberg, Head of Consumer Products at Kraken, noted that the company’s stock token products “have been extremely well-received by clients in Europe, Latin America and Asia”. Kraken acquired Backed Finance, which issues stock tokens under the xStocks brand, last year.

Stock tokens enable investors to trade shares of companies like Apple and NVIDIA after the US market closes. These products also allow investors who are unable to open US brokerage accounts to access the US market and trade anonymously. Chen added that stock tokens also attract users who “may not be able to open an account in the traditional financial world”, as many brokers have stringent identity verification requirements or users may lack a US address.

## Small Trading Volume but Rapid Growth

Trading volume of stock tokens remains relatively small, and is concentrated in the same blue-chip stocks as traditional markets, including Tesla, NVIDIA and Alphabet, as well as crypto-related stocks such as Circle. For instance, the trading volume of tokens representing Tesla shares stood at $12 million on Wednesday, compared to approximately $29 billion worth of Tesla stock traded on Nasdaq the same day.

Nevertheless, the market is expanding. The stock tokens currently in circulation are not actual equities, but crypto tokens issued by third-party entities such as xStocks and Ondo Finance, the two largest providers in this space. These companies purchase US stocks on behalf of investors and hold them in offshore special purpose vehicles (SPVs) that back the tokens. These tokens are not available to US investors.

A Binance spokesperson said, “Exploring the potential to offer tokenized stocks is a natural next step in our mission to bridge traditional finance and cryptocurrency.” In 2021, Binance suspended stock token offerings after receiving a warning from Germany’s Federal Financial Supervisory Authority (BaFin) for providing investment products without a prospectus. Back then, Binance stated that the suspension was to “shift our business focus”.

## Regulatory Vacuum and Hidden Risks

In the United States, lawmakers and regulators have yet to decide how to regulate tokenized stocks. Stock tokens have emerged as one of the sticking points that stalled a cryptocurrency market structure bill in Congress. Industry officials said the bill could make it difficult for US platforms to roll out stock token products quickly, prompting Brian Armstrong, CEO of Coinbase, to state that his company would not support the legislation.

Coinbase is seeking to amend the bill to ensure that the US Securities and Exchange Commission (SEC) can exempt tokenized stock products from certain securities rules, thereby accelerating their market launch. According to Kara Calvert, Head of US Policy at Coinbase, the company believes that blockchain technology renders some existing securities regulations unnecessary.

The crypto industry describes stock token trading as “permissionless”, meaning that these tokens can be traded and held in anonymous accounts. “That’s what we want to lean into—the global permissionless distribution of these assets,” said Nathan Allman, CEO of Ondo.

Anonymous accounts make the market vulnerable to insider trading and market manipulation, which is relatively easy given the small trading volume of stock tokens. Ondo and xStocks stated that they verify the identities of traders who buy and sell tokens directly with them. However, once tokens are issued, they can be traded anonymously. Ondo and xStocks also said they use analytical tools to prevent money laundering.

## Structural Risks and Future Pathways

Stock tokens are designed to track the price of specific stocks, but their prices often deviate slightly from the underlying equities. Another risk for investors lies in the way tokens are structured and who issues them. Companies that create stock tokens typically either purchase stocks and hold them in SPVs or use financial derivatives. Both structures carry the risk that the fund or token issuer could run into trouble, thus harming investors.

Other companies such as Superstate and Securitize are attempting to obtain corporate approval to offer tokenized versions of their stocks, allowing investors to hold shares directly. However, this approach can be slow, and only a handful of issuers have expressed consent.

“Once you have a legally regulated version of the product, it will attract all the liquidity, because why would you take on counterparty risk with a Tesla derivative?” said Carlos Domingo, CEO of Securitize, which aims to enable investors to hold shares directly.

## Risk Warning and Disclaimer

The market is risky and investment requires caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, views or conclusions in this article are in line with their specific circumstances. Investment decisions made based on this article shall be at the user's own risk.