According to reports, EU regulators are looking into Binance’s compliance with securities laws.

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Shortly after the exchange began dealing in stock tokens, financial authorities in Germany and the United Kingdom are currently investigating whether the offering complies with securities laws.

Exchange of cryptocurrencies Binance’s new offering — digital stock tokens containing fractions of equity shares, similar to Tesla and Coinbase — is currently being investigated by European and British authorities for potential securities law violations.

A new report from the Financial Times claims that regulators are concerned the tokens may not provide sufficiently transparent corporate disclosures, specifically an investment prospectus, that would be required if the tokens were judged to be securities. Germany’s Federal Financial Supervisory Authority, or BaFin, told FT reporters that while it could not comment on the case specifically:

“Fundamentally […] the following applies: if tokens are transferable, can be traded at a crypto exchange and are equipped with economic entitlements like dividends or cash settlements, they represent securities and are subject to the obligation to publish a prospectus.”

Binance’s stock tokens allow traders to buy as little as one-hundredth of a share, expressed by a digital token, without having to buy the whole share or keep a physical share certificate. The product was created in collaboration with the fully operated Munich-based investment company CM-Equity AG, which also processes token transactions, and the Swiss-based asset tokenization platform Digital Assets AG.

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Binance told the Financial Times that the tokens are an official CM-Equity offering that complies with the European Union’s MiFID II trading rules as well as BaFin’s banking regulations in response to regulators’ scrutiny. CM-Equity is in charge of custody for purchased shares, as well as product enforcement and Know The Customer rules. Binance claims:

“Currently users only buy and sell the tokens from and to CM-Equity AG, which does not require a prospectus.”

Binance has also stated that the stock prices for the tokens available in Tesla and Coinbase are settled in Binance USD (BUSD) rather than fiat currency. They still may not grant the same voting rights as conventional stock investors will.

Binance’s stock tokens, on the other hand, monitor the share output of both companies and provide investors with exposure to the future dividends associated with absolute, conventional share ownership. “Each digital token represents one share of equity stock and is fully backed by a depository portfolio of underlying securities that represents the outstanding tokens,” said Binance at the product’s launch.

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According to the paper, regulators are worried that the one-page service agreement and key risk documentation given to token holders would not meet regulatory criteria if the stock tokens are considered shares. Experts have also raised concerns about Binance’s presentation of the tokens as shares or derivatives. According to Thomas Tüllmann, a lawyer at Hamburg-based law firm Eversheds Sutherland:

“Taken together with the information from Binance, it’s simply not consistent […] If I was BaFin, I’d write immediately to them and ask where the prospectus is.”

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