Binance’s marketing campaign to citizens in Hong Kong for its security token representing Tesla stock may be a violation of local securities regulations, according to a prominent local news outlet.

Inducing the public to purchase securities is a regulated activity that requires a license from the city’s top financial watchdog the Securities and Futures Commission (SFC), Gaven Cheong, a partner at law firm Simmons & Simmons, told the South China Morning Post on Wednesday. Binance does not appear to have secured a license to market or trade security tokens in the region, according to the report.  

Binance, one of the largest crypto exchanges by volume, launched its Binance stock token on April 12. This new service allows its users to buy fractions of companies’ shares with digital tokens. The zero-commission tokens qualifies holders for returns including dividends.

The users can purchase as little as one-hundredth of a regular stock. Such transactions can only be settled by Binance USD (BUSD), a U.S. dollar stablecoin issued by the exchange. The underlying stocks are in  the custody of a third-party brokerage company, according to Binance’s website. It is unclear which brokerage firm is the custodian and where it is located.  

The posting of announcements that advertise a security token could be seen as an invitation amounting to “dealing” in securities, the report said. The SFC considers security tokens “likely to be securities,” according to its statement regarding security tokens in March 2019. 

Binance had not responded to requests for comments by press time. 

The first stock token issued by Binance is backed by electric car maker Tesla’s shares. Binance also added tokens representing Coinbase’s $COIN stock after the exchange went public in the U.S. last week.

While banks and trading platforms in Singapore have opened compliant security token trading services due to loosening financial regulations, such tokens are still heavily restricted  in many other regions such as mainland China and the U.S. 

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