What are Binance Stock tokens?

When crypto exchange Coinbase listed on NASDAQ on April 14th, Binance offered COIN, a tokenized version of Coinbase stock. They have also listed tokenized versions for Tesla, Microsoft, MicroStrategy, and Apple.

Referred to as ‘synthetic’ digital assets, COIN, TSLA, AAPL, MSFT, and MSTR – as traded on Binance – are marketed as tokenized versions of real-world stocks. However, the legal framework regarding these assets isn’t clear. As with most things in crypto, the approach appears to be build and launch first, and then deal with regulators if and when they catch up.

This article will analyse the current Binance stock tokens, identify any issues and discuss how blockchain infrastructure provider Dusk is working to change the way companies offer and manage their shares.

What are Binance Stock tokens?

Binance, the largest cryptocurrency exchange in terms of volume, has now indirectly entered the traditional stock markets. The exchange launched its ‘stock token’ trading service for its customers on April 12th starting with the Tesla (TSLA) token. It then followed with Coinbase (COIN) and on the 30th of April, Binance completed the listing of its new stock tokens – MicroStrategy, Microsoft, and Apple.

According to Binance, these stock tokens represent the shares (or fraction of shares) of the public companies they are minted for. The exchange claims that these stock tokens are fully backed by shares held by a German asset management company – CM-Equity AG.

CM-Equity AG is a licensed financial service under the German Banking Act. It is overseen by BaFin, which is Germany’s Federal Financial Supervisory Authority. The US comparison would be a licensed stock brokerage. Any customer disputes with CM-Equity AG must be lodged with a German dispute resolution service VuV-Ombudsstelle.

As for settlement, you can redeem these tokens for Binance’s dollar-backed stablecoin – BUSD. Binance states customers in any stock token purchase “are transacting with CM-Equity AG as your counterparty.” This doesn’t mean once you have purchased your COIN tokens you can talk to the German company about them, though, as CM-Equity states in its FAQs that it is solely an infrastructure provider and “doesn´t answer questions on services for end users.”

Nonetheless, let’s take a look at how it all works. Once you open a trade in stock tokens, a Swiss company Digital Assets AG (DAAG) will buy the equivalent amount of the company’s shares on behalf of CM-Equity AG. Further, Digital Assets will mint a token on its private blockchain.

In the next step, the shares purchased by Digital Assets are locked in a security account associated with CM-Equity AG. Once this is done, Digital Assets sends the minted token to Binance via CM-Equity.

While this is a neat solution that allows for these tokens to access new liquidity, one potential problem with the Binance Stock Token model is that when you own a stock token you don’t own all of the rights of owning the shares. For example, you won’t be able to vote at Apple shareholder meetings or sue Apple for a breach of your shareholder rights.

However, Binance says you will benefit from the movements of the underlying share, plus you also get dividends. Essentially, you are making an indirect bet on the underlying company shares.

Binance is currently under scrutiny for marketing its security tokens in Hong Kong. Regulatory authorities are concerned that it violates local securities regulation. According to a report, Binance does not appear to have a license to market or trade securities in the Hong Kong region.

The trading volumes of these tokenized stocks shows that there is an appetite for this offering.

Meeting regulatory requirements with Dusk Network

To date Binance and the FTX exchange are selling the CM-Equity AG stock tokens. But for these types of solutions to achieve scale and avoid potential conflicts with regulators in every jurisdiction, they may need to work with existing solution providers that are already working within regulations, such as Dusk Network, which markets itself as a provider of government compliant Security Tokens

Founded in 2018, Dusk Network is an Amsterdam-based blockchain platform on which companies can launch programmable and confidential securities.

Fundamentally, Dusk is a privacy-focused blockchain for financial applications. It is a layer-1 blockchain with Confidential Security Contract (XSC) standard and supports confidential smart contracts. With Dusk, any enterprise can collaborate to create new financial assets while ensuring they meet compliance requirements.

Here are some major applications of the Dusk Network:

1. Digital Share Registry

Digital share registry saves companies from the laborious and expensive process of keeping and maintaining an updated record of their shares while ensuring the highest level of privacy.

In collaboration with LTO Network, Dusk will tokenize shares for thousands of SMEs in the Netherlands. They will enhance the Dutch digital share registry. Dusk has also got the regulatory nod from Europe and the Royal Dutch Association of Civil-Law Notaries (KNB).

This shareholder registry is a regularly updated list of companies’ shares that live on the blockchain. The best part is that there is no need for companies to ensure regulatory compliance. Instead, the regulations are programmed into confidential smart contracts. This way, shareholder rights, dividend payments, obligations, executing voting rights, etc, are programmatically taken care of.

2. Confidential Security Tokens (XSC)

Security tokens are tokenized versions of traditional securities like stocks, bonds, property, etc. These tokens live on the blockchain so transactions are automatically validated and stored.

If you are a company or platform you can raise capital by issuing XSC tokens on Dusk Network. The Confidential Security Contract (XSC) standard provides you with all the tools to retain control over your securities such as ownership rights. Further, these tokens can be programmed to comply with securities laws in multiple jurisdictions. Moreover, XSC tokens will also reduce costs by enabling easy integrations by industry parties and efficiently execute parameters like dividend payments, voting rights, automate audits, etc.

The XSC tokens also enable users to earn fractions of shares, and save on administration costs.

3. Confidential Smart Contracts

Smart contracts are the building blocks of decentralized applications. Essentially, they are lines of code that run predefined functions. Dusk Network takes smart contract functionality a step further by allowing companies to use public blockchains while ensuring complete data privacy. Dusk’s confidential smart contracts are scalable and privacy centered.

4. Security Token Exchange

Dusk is also building a native Security Token trading exchange where companies and investors can effectively buy and sell tokenized securities. Last year, Dusk received an 840,000 Euro grant from iFinex, the parent company of the famous Bitfinex exchange, to boost the development of such a platform.

Dusk is bringing traditional stocks to the blockchain by providing a robust blockchain infrastructure and within the framework of regulation. They are achieving this whilst also providing a privacy-focused blockchain fabric and Confidential Security Contract (XSC).

Dusk is leading the evolution of stocks to blockchain within a regulatory framework. Exchanges such as FTX and Binance are also proactively listing FAANG stocks, and others, which will accelerate the need for regulators to keep up.

For example, Dusk is a privacy-focused blockchain that provides infrastructure for companies to launch their security tokens in a secure setting and within regulatory frameworks. Dusk has launched a pilot project to digitize Nederlandsche Participatie Exchange (NPEX) services and infrastructure for their thousands of clients. Subsequently, Dusk has since taken a stake in NPEX furthering their commitment to the industry.