Binance claims to be the world’s biggest cryptocurrency exchange by volume © FT montage

Germany’s financial watchdog has warned investors that Binance, one of the world’s biggest cryptocurrency exchanges, has probably violated securities rules over its launch of trading in stock tokens, in a crackdown on the crypto industry’s foray into highly regulated markets.

Bonn-based BaFin published a note on its website on Wednesday afternoon stating that tokens tracking the movement of shares in Tesla, Coinbase and MicroStrategy represent securities requiring a prospectus that has not yet been issued.

BaFin points out that such a violation represents a criminal offence that can be punished with a fine of up to €5m or 3 per cent of the issuer’s last annual revenue. The issuer may be liable for any investor losses.

The watchdog also has the legal power to ban the sales of the securities.

Its move comes after the Financial Times reported last week that European financial regulators were examining Binance’s launch of a service to allow investors to trade fractions of shares through products that use a German broker as an intermediary. Since last week’s report, Binance has widened the stock programme to include other shares such as Apple.

BaFin’s pushback underscores the challenge authorities face as they decide how to oversee businesses specialising in cryptocurrencies such as bitcoin and ethereum when they encroach in to highly regulated markets like equities.

At the time of the tokens’ launch earlier this month, chief executive Changpeng Zhao said they “demonstrate how we can democratise value transfer more seamlessly”. In a recent interview with Bloomberg, he described his business as “very regulated”.

Binance did not immediately respond to a request for comment on BaFin’s statement.

Booming prices of digital currencies and heavy interest from retail investors for share trading have encouraged cryptocurrency exchanges to explore new products that mimic those found in the traditional financial industry. Binance, which claims to be the world’s biggest cryptocurrency exchange by volume, lets its users trade a full suite of crypto derivatives, including futures and options.

In marketing material, it said each token represented a “share in a stock corporation” and provided the “economic returns” of owning those shares. Tokens were bought and sold using Binance’s own cryptocurrency, and Binance said a German group, CM-Equity, was responsible for handling services such as custody for acquired shares, as well as compliance and know-your-customer checks. It was not named in BaFin’s statement on Wednesday.

CM-Equity said the product was Mifid II compliant because it was an over-the-counter swap and the tokens were not transferable to other customers, like shares.

The product had been live for several months and had never had any objections or feedback from BaFin, it added. A representative for the company said it was considering legal action as BaFin’s ruling was “damaging”.

Binance says it has no formal headquarters, but has subsidiaries that are registered with regulators in countries including the UK. The UK’s Financial Conduct Authority told the FT last week that it is “working with the firm to understand the [tokens] product, the regulations that may apply to it and how it is marketed”.

The exchange’s stock token trading platform was still accessible on Wednesday afternoon through internet protocol addresses in the UK and Germany. The main Binance stock token trading website said only listed residents of China, the US and Turkey were banned from using the service.

Bitcoin has tumbled around $10,000 from its record high above $64,000 reached earlier this month, with concerns over the potential for new regulations to dent sentiment. Turkey, home to a large and active crypto market, banned the use of digital coins for buying goods and services on April 16. The country has also launched a sprawling investigation in to several local exchanges.

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