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Binary options regulations - what the future holds

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Black holes or sun shine?

France recently banned binary options advertisement, and Belgium completely banned retail online trading in forex and binary. There are rumors that the Netherlands will also create restrictions on that matter. Traders are asking what is next. Will binary trading be completely forbidden?

Since CySEC started regulating binary firms in 2012, the industry is still pushing its way out of a grey area. There are many brokers operating unregulated, and we can say that the situation is pretty much like the online forex trading during its infancy period.

Obviously, it took some years for the forex industry to be fully regulated, and we can expect same thing to happen with the binary business. The FCA in the UK has taken steps in regulating binary options. Forex brokers with FCA licenses might offer a binary product to their customers, which could be a sign that a major change is coming.

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The problem

The 24option ban in France proved that CySEC is not able to provide a fair trading environment in the European Union. Despite €2 million in fines and 11 license suspensions in 2016 by CySEC, the regulators in Europe continue to receive massive numbers of complaints and warnings from traders.

The problem with binary options is not the trading instrument itself but the way some companies use it to solicit customers. The product is frequently presented as an easy way of making money from home, and when some people fall, there are others to offer it.

These companies could be very aggressive in their sales approaches, asking for high deposits with luxury promises for big wins. Attaching a welcome bonus to the deposit is a common trick, after which the client cannot make a withdrawal until the bonus requirements are fulfilled.

Many were scammed after they trusted their money to an account manager who works for the brokerage firm. We are wondering what kind of people believe that someone working at the brokerage will make them profits.

Our guess is that they are not experienced retail traders; most probably, these are random guys looking for easy money. The brokers are targeting such clients with fake testimonials, like “Teenage binary trader swapped shifts at McDonald’s for a gold Bentley”.

What is common with such “scam” companies is missing regulations. As we mentioned, even CySEC regulation is not a guarantee for a fair broker. Many traders in France, for example, send complaints to the AMF concerning Cyprus regulated brokers.

The Cypriot regulator has fined some of the big players, like 24option and Banc de Binary, but there are hundreds of other brokers operating in the EU, and CySEC is obviously not capable of providing adequate supervision to all.

Watchdogs Fail

Financial regulators, such as the AMF (France), AMF (Canada), and NSSC (Canada), are trying to protect traders by creating blacklists of binary brokers. These lists are probably updated on a monthly basis, however, we are not sure about that. In our opinion, they are not effective enough.

When these watchdogs receive some number of complaints about a particular broker, they put that broker on the blacklist. However, new brokers pop up every day, so if a trader checks the list for a company named RichieRichBinary.com (imaginary). He/she might not find it. This doesn’t mean Richie’s trading firm is legit just because is not on the blacklist.

That is the reason why FSMA in Belgium completely banned online binary trading; the watchdog failed to chase scam brokers and has announced the strictest measures.

Instead of creating a blacklist with hundreds of brokers, regulators should probably find a way to regulate binary options. We believe it would be easier for a Canadian trader if he/she knows the regulated companies instead of checking whether his/her broker is on the blacklist.

The bright side

Under the pressure of ESMA (European Securities Market Association), CySEC finally started to work and enact some measures that will protect customers. First, CySEC has asked brokers to display ask and bid price, as well as how strike price is calculated.

CySEC has banned welcome bonuses, and the bad practice of refusing withdrawals because of bonus requirements will be eliminated. The next expected step is the Cypriot regulator approving same-day withdrawal option for all brokers.

As we mentioned, the FCA (UK) regulates forex brokers, and some of these brokers also offer binaries. The situation in Australia is similar, keeping in mind that two ASIC regulated firms already included binary trading as an additional product.

In the United States, binary options are regulated only in a form of exchange trading. NADEX is operating with a CFTC license, and it is a well-known binary exchange, which makes it a clear choice for US traders. It is a different story that many traders prefer the European brokers, and they are looking for unregulated firms.

Final words

The brutal truth is that if you don’t have any experience with financial markets and you step into trading, you will most probably lose your funds even if you are trading at the most regulated firm. Our advice is, before you start looking for a broker, you better be sure that you have an idea what binary trading is about.

Of course, regulation is good for traders; at least deposits are protected and segregated. The main regulator, CySEC, showed some steps in the right direction: bonuses are finally out of the game, which is a positive sign.

Now, we have to wait and see what steps FCA will take. Will the UK Conduct Authority also regulate binary brokers? In our view, more financial regulators will provide brokers’ licenses in the near future.

We need to mention that, with more regulations coming, this doesn’t mean unregulated firms will stop working. Be aware!

Disclaimer: The article is written for informative purposes only and it is not financial advice. The author does not have any position in the currency pairs mentioned, and no plans to initiate a position. He wrote the article himself and expressed his own opinions. He has no business nor personal relationships with any mentioned government entities or stocks. Readers should not treat any opinion expressed by the author as a specific inducement to make a particular trade or follow a particular strategy, but only as an expression of his opinion.

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