Bypassing U.S. regulations, Binance cryptocurrency exchange restarts "U.S. stock tokens," creating a parallel world stock market

Major global cryptocurrency exchanges are competing to launch crypto token products that track U.S. stocks, creating a parallel stock market outside the U.S. regulatory framework. This trend allows overseas investors to bypass traditional brokerage restrictions on trading U.S. stocks, but it also raises concerns about market manipulation and regulatory arbitrage.

According to The Information, citing informed sources, Binance is exploring the reintroduction of stock tokens on its exchange, having previously halted such products in 2021 due to warnings from German regulators. Haider Rafique, global managing partner and chief marketing officer of another major global platform, OKX, stated that the company is also considering offering tokenized stocks. Exchanges like Kraken and Bitget, as well as decentralized platforms like Jupiter, have already made progress in the stock token space.

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

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

The New Battleground for Crypto Exchanges

Cryptocurrency exchanges are eager to offer stock token products primarily because the cryptocurrency market is sluggish, while the stock prices of U.S. tech giants continue to rise. Exchanges do not want customers' idle funds to flow into the traditional stock market.

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

Mark Greenberg, head of consumer products at Kraken, stated that the company's stock token products “have been very well received among customers in Europe, Latin America, and Asia.” Kraken acquired Backed Finance, which issues stock tokens under the xStocks brand, last year.

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

Small Trading Volume but Rapid Growth

The trading volume of stock tokens remains small and is concentrated on popular stocks that are also favored in traditional markets, including Tesla, Nvidia, and Alphabet, as well as crypto-related stocks like Circle. For example, on Wednesday, the trading volume of tokens representing Tesla shares was $12 million, while the value of Tesla shares traded on Nasdaq that day was approximately $29 billion.

**Nevertheless, the market is expanding. The stock tokens currently circulating in the market do not represent actual equity but are crypto tokens issued by third parties such as xStocks and Ondo Finance These two companies are the largest providers. ** These companies represent investors in purchasing U.S. stocks and placing them into offshore special purpose entities that support tokens. These tokens are not available to U.S. investors.

A Binance spokesperson stated, "Exploring the potential of offering tokenized stocks is a natural next step in our mission to bridge traditional finance and cryptocurrency." In 2021, Binance halted the offering of stock tokens after receiving a warning from Germany's financial regulator BaFin regarding its provision of investment products without a prospectus. Binance stated at the time that the cessation of support for stock tokens was to "shift our business focus."

Regulatory Vacuum and Risk Concerns

In the U.S., lawmakers and regulators have yet to decide how to handle tokenized stocks. Stock tokens have become one of the issues that have stalled a cryptocurrency market structure bill in Congress. Industry officials have indicated that the bill could make it difficult for U.S. platforms to quickly offer stock tokens. This prompted Coinbase CEO Brian Armstrong to state that his company would not support the bill.

Coinbase hopes to amend the bill to ensure that the U.S. Securities and Exchange Commission can exempt certain securities rules for tokenized stock products, allowing such products to enter the market more quickly. According to Kara Calvert, Coinbase's head of U.S. policy, the company believes that blockchain technology makes certain existing securities rules unnecessary.

The crypto industry claims that trading stock tokens is "permissionless," meaning they can be traded and held in anonymous accounts. "This is what we want to lean into—global permissionless distribution of these assets," said Nathan Allman, CEO of Ondo.

Anonymous accounts make the market susceptible to insider trading and market manipulation, and due to the low trading volume of stock tokens, manipulation is relatively easy. Ondo and xStocks stated that they would verify the identities of traders directly buying and selling their tokens. However, after that, the tokens can be traded anonymously. Ondo and xStocks also mentioned using analytical tools to prevent money laundering.

Structural Risks and Future Pathways

Stock tokens are designed to track the price of specific stocks, but the prices of the tokens often deviate slightly from the actual stocks. Another risk faced by investors is the structural manner of the tokens and who constructs them. Companies creating stock tokens typically either purchase stocks and place them into special purpose entities or use financial derivatives. Both structures carry the risk of funds or token issuers encountering difficulties, thereby harming investors.

Other companies like Superstate and Securitize are attempting to obtain corporate licenses to offer tokenized versions of their stocks, allowing investors to directly own shares. However, this approach may be slow, with only a few issuers agreeing.

"Once you have a legally regulated version of the product, it will attract all the liquidity, because why would you take on the counterparty risk of Tesla derivatives?" said Carlos Domingo, CEO of Securitize, which aims to allow investors to directly own shares