Bypassing US regulations, Binance crypto exchange restarts "US stock tokens," creating a parallel world stock market.

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Major global cryptocurrency exchanges are racing to launch crypto token products that track U.S. stocks, creating a parallel equity market outside the realm of U.S. regulation. This trend allows overseas investors to bypass traditional broker restrictions when trading U.S. stocks, but also raises concerns about market manipulation and regulatory arbitrage.

According to sources cited by The Information, Binance is exploring relaunching stock tokens on its exchange, after having suspended such products in 2021 due to a warning from German regulators. Haider Rafique, Global Managing Partner and Chief Marketing Officer of OKX, another major global platform, said his company is also considering offering tokenized stocks. Exchanges like Kraken and Bitget, as well as decentralized platforms such as Jupiter, have already made progress in the field of stock tokens.

Data analytics platform RWA.xyz shows that the current total value of all circulating tokenized stocks is $915 million, a 19% increase from a month ago. Although still negligible compared to the roughly $60 trillion market cap of the S&P 500, this market is rapidly expanding.

The New York Stock Exchange and Nasdaq also plan to allow stock token trading. NYSE announced Monday it is developing a platform for trading stock tokens and will seek regulatory approval.

New Battleground for Crypto Exchanges

Cryptocurrency exchanges are eager to offer stock token products mainly because the crypto market is sluggish, while U.S. tech giant stock prices continue to rise. Exchanges don't want customers' idle funds to flow into traditional stock markets.

“Crypto users hold a large amount of USDT sitting there...they are looking for other financial assets outside the crypto industry,” said Gracy Chen, CEO of Bitget, a crypto exchange that launched stock tokens last September.

Mark Greenberg, head of consumer products at Kraken, said the company's stock token products "have received very positive feedback from clients in Europe, Latin America, and Asia." Kraken last year acquired Backed Finance, which issues stock tokens under the xStocks brand.

Stock tokens allow investors to trade shares of companies like Apple and Nvidia after U.S. markets close. These products also allow investors who are unable to open U.S. brokerage accounts to access the U.S. market and trade anonymously. Chen noted stock tokens attract users who "may not be able to open accounts in the traditional financial world," as many brokerages' identity verification requirements are hard to meet or users may not have a U.S. address.

Small Trading Volume but Rapid Growth

Stock token trading volume remains small and is concentrated on the same popular stocks as in traditional markets, including Tesla, Nvidia, Alphabet, and crypto-related stocks like Circle. For example, on Wednesday, the trading volume of tokens representing Tesla stock reached $12 million, while the value of Tesla stocks traded on Nasdaq that day was about $29 billion.

Nevertheless, the market is expanding. The stock tokens currently circulating on the market do not represent actual equity, but are crypto tokens issued by third parties such as xStocks and Ondo Finance, the two largest providers. These companies purchase U.S. stocks on behalf of investors and put them into offshore special purpose entities to back the tokens. These tokens are not open to U.S. 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 crypto.” In 2021, Binance stopped offering stock tokens after receiving a warning from Germany's financial regulator BaFin about offering investment products without a prospectus. At the time, Binance said the move was meant to “shift our business focus.”

Regulatory Vacuum and Risks

In the U.S., legislators and regulators have yet to decide how to handle tokenized stocks. Stock tokens became one of the issues that held up a crypto market structure bill in Congress. Industry officials said the bill may make it difficult for U.S. platforms to quickly offer stock tokens. This prompted Coinbase CEO Brian Armstrong to say his company would not support the bill.

Coinbase hopes to amend the bill to allow the U.S. Securities and Exchange Commission to exempt certain securities rules for tokenized stock products, making it easier for these products to enter the market faster. According to Coinbase’s U.S. policy chief Kara Calvert, the company believes blockchain technology renders some existing securities rules unnecessary.

The crypto industry says trading in stock tokens is “permissionless,” meaning they can be traded and held in anonymous accounts. “This is what we want to lean toward—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, and since trading volume in stock tokens is so small, manipulation is relatively easy. Ondo and xStocks claim they verify the identity of traders who buy and sell tokens directly with them. But after that, tokens can be traded anonymously. Ondo and xStocks also say they use analytics tools to prevent money laundering.

Structural Risks and the Path Forward

Stock tokens are designed to track the price of specific stocks, but token prices often deviate slightly from the actual stock price. Another risk for investors is how the tokens are structured and by whom. Companies creating stock tokens typically either buy stocks and put them into special purpose entities or use financial derivatives. Both structures pose risks to investors if the fund or token issuer encounters difficulties.

Other companies such as Superstate and Securitize are seeking company licenses to offer tokenized versions of stocks so that investors can directly own shares. But this approach may be slow, and only a handful of issuers have agreed.

“Once you have a legally regulated version of the product, all the liquidity will flow to it, because why would you bear the counterparty risk of a Tesla derivative?” said Carlos Domingo, CEO of Securitize, which aims to allow investors direct ownership of shares.

Risk DisclaimerThe market involves risk, so invest cautiously. This article does not constitute personal investment advice and does not take into account the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinion, viewpoint, or conclusion in this article is appropriate to their specific circumstances. Invest accordingly at your own risk.

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