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

Marketing campaign could be deemed a regulated activity that requires a licence in Hong Kong, which Binance does not have according to SFC records
Binance website does not mention Hong Kong among jurisdictions that bar trading in security tokens

Stocks

Georgina Lee

Published: 12:30am, 22 Apr 2021

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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.

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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 Simmons & Simmons.

“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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In a statement on security token offerings issued in March 2019, the commission said that security tokens are “likely to be ‘securities’ under the Securities and Futures Ordinance and so subject to the securities laws of Hong Kong.”

“Any person who markets and distributes security tokens (whether in Hong Kong or targeting Hong Kong investors) is required to be licensed or registered for Type 1 regulated activity (dealing in securities) under the Securities and Futures Ordinance,” the SFC said. It also stated that security tokens should only be offered to professional investors.

A SFC spokesman said on Monday that it would not comment on individual cases.

At the close on Tuesday, the Tesla security token was being quoted at US$718.79 on Binance. 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.

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