Bybit's launch of US stock trading has sparked controversy, clarifying the compliance issues behind "crypto exchanges selling stocks."

Author: Scof, ChainCatcher

Editor: TB, ChainCatcher

On May 19, Bybit announced that it became the first major cryptocurrency exchange to support direct trading of global stocks using USDT.

However, KOL Crypto Fearless pointed out that Bybit is not the only cryptocurrency exchange in the world offering stock trading as it claims, which sparked heated discussions in the community.

Controversy 1: Not the world's first cryptocurrency exchange supporting US stock trading

Although Bybit claims in its official promotion to be the "world's only cryptocurrency exchange supporting stock trading," this is not the case.

As early as 2020, the now-defunct FTX had launched stock tokens and forex trading services, allowing users to indirectly invest in US stocks using crypto assets and achieve mapping through on-chain tokens. Even earlier, platforms like eToro and Bitpanda had gradually opened product channels between cryptocurrency and traditional securities markets. Although the product mechanisms differ slightly, in terms of positioning as a "cryptocurrency platform providing stock trading," Bybit cannot be considered a pioneer.

Controversy 2: Not purchasing actual stocks, but trading through CFD services

The stock trading feature launched by Bybit primarily provides users with stock contracts for difference (CFD) trading services through its MT5 platform. The specific working principle is: users create an MT5 sub-account within the Bybit platform, fund that account with USDT, and then "trade" stocks in the system in the form of contracts for difference. In reality, users do not gain ownership of these stocks and do not have any shareholder rights. To some extent, it is more like users betting on price fluctuations, with the platform or its partnered market makers assuming the role of providing liquidity. (According to Bybit's official announcement, there is currently no clear indication of which market maker provides trading depth.)

As for CFDs, they are essentially a derivative trading tool, formally known as Contract for Difference, allowing users to trade based on asset price movements without holding the asset itself. This mechanism is relatively common in traditional finance; however, the premise for using this mechanism is that the platform must hold relevant derivative trading licenses.

According to public information, Bybit has currently obtained licenses including Dubai VARA, Cyprus CySEC, and Georgia VASP licenses. Additionally, it has received pre-approval from Kazakhstan AFSA and UAE SCA and is advancing MiCA-related applications in France. However, the licenses obtained mainly cover the fields of crypto assets and contracts for difference and do not constitute legal access to the US securities market.

In this regard, Guo Yatao, a lawyer and partner at Beijing Strategy Law Firm's Digital Economy Committee, told ChainCatcher that the current regulatory system in the US is designed for traditional securities trading products and models, making it difficult to fully cover new financial products and trading mechanisms, including stablecoin settlements and CFD structures. Under the premise that the legal application standards have not been updated, such businesses are unlikely to meet regulatory requirements and will inevitably face non-compliance.

Currently, Bybit's official announcement does not show information about the third-party asset management institutions responsible for Bybit's stock trading business, nor does it provide specific clearing path explanations.

As a platform, publicly clarifying the product mechanism is an important measure to reassure users. Therefore, ChainCatcher will continue to monitor Bybit's subsequent official announcements and provide relevant information for investors interested in this product.

Regarding cryptocurrency companies venturing into US stock-related businesses, compliance remains a significant challenge

Of course, Bybit is not an isolated case; native cryptocurrency companies venturing into traditional stock and bond markets face compliance challenges.

Currently, the mainstream product mechanisms for cryptocurrency exchanges entering the traditional securities market typically do not involve actual stock holdings but achieve price mapping through the aforementioned contracts for difference (CFD), price-tracking derivatives, or stock tokens.

In practice, different platforms have constructed various product paths and compliance strategies based on their regulatory positioning and business models.

For example, Robinhood primarily operates under the US domestic regulatory system, with its stock and ETF business regulated by the SEC and FINRA. Its crypto business has also obtained a virtual currency license in New York, and its "zero commission + compliant clearing" model is popular among young users.

eToro supports users in investing in US stocks, ETFs, forex, and other assets in fiat or cryptocurrency form, and holds regulatory licenses in multiple jurisdictions. Its stock trading adopts a model that coexists with real stocks and contracts for difference (CFD). Bitpanda provides users with fractional stock trading based on derivative agreements through its so-called "Bitpanda Stocks" service, relying on market maker mechanisms for liquidity support, and clearly indicates that users do not actually hold stocks but are participating in price-tracking financial contracts.

The following image compares the mechanisms of cryptocurrency platforms supporting US stock trading:

In fact, compared to traditional securities firms, cryptocurrency exchanges face compliance hurdles far beyond just obtaining a license if they want to legally provide stock trading services. This involves regulatory differences across various jurisdictions.

For instance, in the US, any platform involved in securities trading must obtain a securities dealer or alternative trading system (ATS) license and be subject to ongoing regulation by the SEC and FINRA. Trading data must be incorporated into compliance clearing institutions like the DTCC system. Platforms must disclose the destination of user funds and explain the trading execution path and asset custody methods. Otherwise, even if the platform itself is not in the US, as long as it opens business to US users, it may be deemed to be illegally providing securities services.

Moreover, even in regions with relatively relaxed compliance, such as Dubai, Singapore, and Mauritius, cryptocurrency exchanges must apply for specific financial service licenses to provide stock CFD services and establish independent entities.

Taking Bybit as an example, it currently uses the MT5 platform operated by Infra Capital Limited, which is registered in Mauritius, but this entity has not explicitly disclosed what financial licenses it holds locally. Additionally, Bybit has stated in its user agreement that in the event of a dispute, arbitration will be handled by the Singapore International Arbitration Centre, further complicating its legal entity structure and, to some extent, increasing the threshold and cost for users to protect their rights, while obscuring the path for users to seek redress.

In this regard, ChainCatcher learned from Bai Zhan, head of the Mankun Hong Kong office, that the US stock-related CFD services provided by cryptocurrency exchanges are restricted for retail users in most countries, especially in the EU, UK, Japan, and South Korea, or require platforms to hold local derivative sales qualifications. Therefore, using the promotional phrase "directly trading US stocks with USDT" can easily lead to unnecessary misunderstandings from a regulatory perspective.

Guo Yatao also pointed out that financial licenses have national and regional restrictions; the VARA license in Dubai cannot authorize the provision of securities products to US users. He also reminded that in the judicial field, the US practices "long-arm jurisdiction" and has protective jurisdiction principles, meaning that as long as the service targets include US users, the platform may be seen as violating local financial regulations. At this stage, the combination of "stablecoin + CFD + US stocks" remains in a regulatory gray area, lacking clear compliance basis.

In summary, for cryptocurrency enterprises looking to venture into traditional financial businesses, compliance is not just a licensing issue but involves a complete regulatory system. On one hand, companies need to establish strict KYC and AML systems to monitor user identities and trading behaviors; on the other hand, they must set trading rules to prevent market manipulation and abnormal fluctuations, as well as define restricted areas to block users who do not meet local regulatory requirements.

Ultimately, it is still a matter of cryptocurrency exchanges transforming to " land "

Currently, global regulation is becoming clearer but also increasingly stringent. As traditional financial institutions accelerate their entry, native cryptocurrency exchanges have relatively limited paths to "land" and transform.

One way is to align with sovereign capital and policy resources. For instance, Binance has been strengthening its presence in the Middle East in recent years. In March of this year, Abu Dhabi's state-owned capital MGX announced a $2 billion investment in Binance, becoming a key supporter in Binance's global compliance restructuring process.

Recommended reading: 《Why did Binance, which is not short of money, raise $2 billion by cozying up to the UAE royal family?》

Another way is to collaborate with large institutions that have already obtained compliance status. A typical case is the acquisition of the cryptocurrency options exchange Deribit by Coinbase for $2.9 billion.

Recommended reading: 《The $2.9 billion acquisition sets a record in crypto history: Why did Deribit choose to retreat?》

Finally, there is the approach of applying for multiple financial regulatory licenses, including securities, payment, CFD, custody, etc., to establish a legal and compliant trading system, but this path is very costly.

Taking "launching US stock trading" as an example, exchanges need to resolve a complete set of regulatory loops, including the definition of securities, license attribution, trading execution paths, clearing custody, KYC/AML processes, and user geographical isolation.

In Hong Kong, for example, if a cryptocurrency exchange wants to complete a compliance application, it faces not only the difficulty of approval but also high costs from multiple dimensions. According to an earlier interview by DeThings with Liu Honglin from Mankun Law Firm, the initial investment for a license application could be as high as HKD 30 million to 40 million, with annual compliance operating costs around HKD 20 million; in terms of human resources, the platform needs to establish a legal and compliance team locally and hire qualified licensed responsible officers (Responsible Officer, RO). Additionally, investments are needed for cold wallet deployment, data auditing, user asset isolation, risk management systems, and other infrastructure construction.

Bybit co-founder Ben also mentioned in a podcast that the regulatory costs and risks in the US are high and not worth the investment. Therefore, the company has intentionally stayed away from the US market since its inception, even avoiding hiring employees with US green cards.

However, in the long run, it is an inevitable trend for native cryptocurrency exchanges to embrace compliance, and "selling stocks on the exchange" may just be a small step in that direction.