Are Binary Options Legal?

Introduction

Binary Options is many different things to different people. There are traders who believe it is all a scam, and there are those who will swear that binary options is a genuine moneymaker. Binary options legality also differs from one country to another, depending on how the regulatory agencies in those organizations see it.

Some country regulators have embraced binary options, while others have rejected it totally and do not want their citizens to have anything to do with this market. There are also some which have adopted a more cautious “wait and see” approach to binary options, while some have decided to make modifications to the structure of binary options so as to put a stamp of legality on the financial product. There are even countries whose regulators have assumed a totally nonchalant attitude to it all and do not really care about what is said or what goes on in that market.

In other words, binary options legality can only really be explained in the context of the laws of each country as well as by the stand of the regulatory agencies in those countries.

Binary Options Legality: Country Examples

Here are a few examples of binary options legality as interpreted under the laws of several countries which offer the product in some form.

1. United States

It is only natural that we start from the United States, as this is the country where binary option trading was born. Binary options trading in the US started in 1973. There were really no restrictions on who could trade binary options at the time. The market conditions could only be met by institutional traders in any case, so retail binary options trading was not seen at this time. The SEC decided to introduce retail binary options in 2008, and gave clear conditions under which this could be done. Regulation was to be handled by the Commodities and Futures Trading Commission (CFTC), and the assets to be traded were to be restricted to assets listed on the US exchanges. At this time, online gambling had already been prohibited by a US Appeals Court Ruling of 2002. The classification of European-style binary options as a form of online gambling meant that it was forbidden for US nationals to participate in this, and foreign companies trying to market binary options in the US were also warned to stop (CFTC’s warning to Banc de Binary is well documented).

Presently, only US-based companies such as NADEX and Cantor Exchange can offer binary options on US assets. US citizens are prohibited from trading binary options with brokers anywhere else.

1. Cyprus

Binary options in Cyprus were unregulated until 2013 when the Cyprus Securities and Exchange Commission (CySEC) classified binary options as a financial product and hence became subject to regulation.

What is CySEC’s role in all this?

The role of CySEC as far as binary options are concerned is that of regulation, supervision, licensing and enforcement. Since commencement of its regulatory function, CySEC has licensed several brokers and de-registered several previously licensed binary options brokers. CySEC’s job is considered the toughest, as Cyprus hosts more binary options brokers than any other country in the world. CySEC has been criticized for being too soft in its enforcement approach when compared with other regulators.

1. Japan

Japan’s binary options industry is regulated by the Financial Futures Association of Japan (FFAJ). The FFAJ is perhaps credited as being the first to take very tough stances against some of the practices of binary options brokers that were seen as unwholesome. When brokers began to abuse the bonuses provided on deposits, the FFAJ came down hard and banned the issuance of bonuses as an account opening incentive. The FFAJ also banned the short-term options and drew up guidelines on which brokers had to operate. As a result, many of the platform providers have had to make adjustments to their product offering to the Japanese market.

1. Australia

The financial markets in Australia are regulated by the Australian Securities and Investment Commission (ASIC). ASIC has also begun a massive clampdown on illegal binary options brokers. The legality of binary options in Australia starts with whether the brokerage is based in Australia or not. ASIC’s rules demand that any offshore broker wishing to serve the Australian market must have a full-fledged functioning office in Australia with certain staffing requirements. Offshore brokers offering asset-or-nothing options to Australian citizens without a local presence in Australia are now banned from doing so. ASIC is actively collaborating with the Japanese regulators to ensure that any offshore brokers in Japan comply with this directive not to market their products to Australian citizens.

1. Malta

Malta took a bold step to re-define the asset-or-nothing market by transferring the regulation of binary options from the Malta Gaming Commission to the Malta Financial Services Authority (MFSA). The MFSA set a strict capital requirement for binary options brokers at 730,000 Euros. The 2017 update to the MFSA Rules for Forex and CFD Providers (which also includes category 2 and 3 companies offering binary options) has maintained this capital requirement at its current level. This measure was taken to ensure that a firm was capitalized enough to pay out withdrawal funds to investors when requested for.

1. Belgium, Italy, France and Canada

Regulators of financial markets have banned the trading and marketing of binary options within their jurisdictions. All forms of binary options advertising is prohibited in these countries.

1. Israel

Israel has a blossoming binary options industry, but weak regulation over the years has led to the proliferation of many scam companies. Presently, Israel’s regulatory watchdog and the cabinet are planning to reel out rules and regulations to sanitize and regulate the industry. These rules, which are expected to kick in later in 2017, will do a lot to improve investor confidence in the Israeli binary options market. Cyprus and a few other countries experienced similar circumstances but they have improved their situation through passage of binary options legality regulations and enforcement of these laws.

Components of Binary Options Legality

The key components of binary options legality codes include:

1. Passage of laws which clearly define binary options as a financial product worthy of regulatory oversight by the relevant agencies.
2. Passage of laws which setup a regulatory agency (where none was existent) or which strengthen existing agencies.
3. Defining the actions of such agencies such as regulating the market and licensing brokers in the industry.
4. Ensuring protection of investors’ funds.
5. Empowering the regulatory agencies for enforcement and prosecution where there have been infractions.

Proper Definition of Binary Options as a Financial Product

A major obstacle to effective regulation of binary options has been the lack of proper classification of binary options as a financial product. There are still countries which have left binary options to the regulatory oversight of gambling commissions. This is impeding the proper oversight of the binary options market. It is important that binary options brokers are regulated and licensed the same way brokers in the forex, futures, equities and options markets are regulated so as to provide uniformity in oversight.

Strengthening of Regulatory Agencies

Regulators are only as powerful as the laws which back them up. Binary options regulators need to be strengthened to carry out their functions effectively through enabling laws.

Protection of Investors’ Funds

An essential part of binary options legality is ensuring protection of investors’ funds against broker malpractices and bankruptcy of the brokerage firm. This is usually employed by ensuring that brokerages maintain segregated accounts. Segregation means maintaining traders’ funds in an account that is separate from that of the broker so as to insulate those funds from any adverse occurrences which threaten the financial health of the broker. Sadly, only few binary options regulators are enforcing this and this needs to be improved.

Enforcement and Prosecution

There has to be a strong signal sent to errant brokers about the penalties for crimes against investors. This is where the enforcement and prosecution functions of regulators come in. The CFTC in the United States has one of the strongest enforcement divisions of any regulators in the world. Many brokerages and their top management have paid hefty prices in jail time or financial penalties for infractions against investors. FXCM LLC was penalized $14 million for price manipulation and as at 2017, the company has been kicked out of the US market entirely for repeat offences. Israel is carrying out series of raids against binary options companies accused of cheating their traders out of monies deposited for trading.

Are Binary Options Legal?

The answer to this question is still unfolding in many countries and has been answered in others. In the US, they are legal if only they are offered by US-based brokers and feature assets listed on US exchanges only. In Cyprus, Malta, Australia and Japan, they are considered legal. In France, Italy and Belgium, they are considered illegal.

FAQ’s

Q: Are binary options legal?

Answer: In many regions yes they are. However in France, Belgium and Italy they are not,

Q: Why is the legality of binary options such a grey area?

Answer: There is no one single regulatory agency that oversees the whole of this trading type, instead each country decides n how they want to view it. In Canada for example it is completely unregulated so local residents can trade with offshore companies. Whereas next door in the US, the residents may only trade with companies that are regulated locally.

Q.: Is there any investor protection?

Answer: Yes if you work with a regulated broker you are protected by the laws of their regulation eg. CySEC brokers offer you protection of your funds up to the tune of 20,000 euros, whereas the FCA in the UK protects your deposits up to £50,000. The answer here is to work with regulated brokers only.