Why Are Binary Options Banned in Some Areas?
Contents
Binary options are banned or heavily restricted in many parts of the world due to their high risk and association with scams and fraudulent activity. The basic premise of binary options is that traders bet on whether the price of an asset will rise or fall within a very short timeframe, often just minutes. This “all-or-nothing” structure makes it highly speculative, leading to significant losses for many traders, especially beginners.
In many countries, the law makers and financial authorities have not banned the binary option outright – they have only imposed restriction, typically restrictions that aim to protect non-professional traders (retail traders, hobby traders) from being exploited by binary options brokers. Examples of places where brokers are not permitted to market or sell binary options to non-professional traders are the United Kingdom, Australia, and many countries within the European Union. In the United States, binary options can only be legally sold on certain approved exchanges.
While binary options can offer legitimate trading opportunities, their highly speculative structure and prevalence in scams make them unsuitable for most retail traders.
Examples of Key Reasons for Banning or Restricting Binary Options
- High Risk, Binary Outcome, and Highly Speculative Nature
Binary options are incredibly risky because they typically involve speculation on extremely short-term price movements.The outcome depends on whether the price of an asset, such as a stock or currency, will go up or down within a short period, sometimes as little as less than 1 minute. Many traders end up losing because of the fast-paced and unpredictable nature of the market. With a binary option, you either get paid or lose everything you risked, so your money can vanish very quickly. Therefore, many law makers around the world have decided that binary options should not be available for non-professional traders.
- Similarities to Gamling The short time-frames and the binary outcome make binary options akin to quick forms of gamling, e.g. playing the roulette or putting coins into a slot machine. Therefore, it can be argued that binary options brokers should have to adhere to the same strict rules as gambling sites – and also be more honest in their marketing and inform about the risks of gamling addiction. In some countries, binary options are outlawed due to a general ban on gambling.
- Widespread Fraud Binary options trading has been plagued by fraudulent brokers, especially those that operate unregulated platforms. These brokers lure in traders with promises of guaranteed profits but often manipulate the market, refuse withdrawals, or disappear with their clients’ funds. Many scams involve rigging the outcome or delaying the trades to ensure traders lose money.
There are also fraudsters that prey on binary options traders by offering scammy trading systems and software for automated trading, often making false claims about how using their products would be low-risk or even no-risk.
- Lack of TransparencyMany binary options brokers operate from countries and territories known to have lenient rules or simply not very good at going after scammers. Operating from countries with poor legal oversight tend to go hand in hand with a lack of transparency that leaves traders vulnerable to unfair practices, such as altering the terms and conditions without notice or misleading advertising that minimizes the risks inherent to binary options trading.
- The Prevalence of Misleading Marketing
Binary options brokers often market their services as an easy and low-risk way to make quick money, targeting inexperienced traders who don’t fully understand the risks. They often downplay the potential for loss and overhype the likelihood of high returns. This creates a misleading perception that binary options are a low-risk investment, when in reality, they are highly speculative and high risk.
Examples of Parts of the World Where Binary Options Are Banned or Heavily Restricted
- Many countries within the European Union (EU) In 2018, the European Securities and Markets Authority (ESMA) put a temporary ban on the marketing, distribution, and sale of binary options to retail investors across the EU. This ban was put in place to give each membership country some time to do their own evalutation and enact their own rules about binary options trading. In 2019, ESMA announced that they would not renew the ban, and that it would therefor expire on the 1st of July, 2019. They decided to not renew the ban, since so many of the membership countries had now already enacted their own binary options regulation that was at least as strict as the temporary ESMA ban.
Within the European Union, many countries now have permanent bans against the marketing, distribution, and sale of binary options to retail investors.
- United Kingdom (UK) In the UK, the Financial Conduct Authority (FCA) banned the sale, marketing, and distribution of binary options to retail investors in 2019. The FCA identified the product’s speculative nature and its role in fraudulent activities as key reasons for the ban.
- United States In the U.S., binary options are legal, but must be traded on a regulated U.S. exchange. These exchanges are Designated Contract Markets (DCMs), and at the time of writing, there are only three DCMs in the United States offering binary options: Cantor Exchange, LP; Chicago Mercantile Exchange, Inc. (CME); and the North American Derivatives Exchange, Inc. (NADEX). Binary options trading outside DCMs is not legal.
- Israel In 2017, Israel became the first country to fully ban binary options. This decision came after years of complaints from victims worldwide who were scammed by Israeli-based online brokers targeting traders all over the world. The ban does not only cover offering binary options to traders in Israel – offering binary options to traders abroad is also illegal.
- Canada In 2017, The Canadian Securities Administration (CSA) announced the implementation of “Multilateral Instrument 91-102 Prohibition of Binary Options”. This made it illegal to advertise, offer, sell, or otherwise trade binary options where the lifespan is shorter than 30 days to any individual. The ban does not distinguish between professional and non-professional traders. So, while binary options are technicaly legal in Canada as long as they are not shorter than 30 days, this ban effectively prohibited the vast majority of all binary options since the binary options market is heavily dominated by very short-term binary options. When the prohibition was announced, the CSA said that binary options was the leading type of investment fraud facing Canadians, and that the ban conveyd a clear message that these products were unsuitable for individuals because of their risky characteristics.
In 2016, the year before the prohibition was announced, the CSA Binary Options Task Force was established to actively fight binary options fraud.
- Australia
In May 2021, the Australian Securities and Investments Commission (ASIC) banned brokers from selling binary options to retail investors. The ban was motivated by the high-risk nature of these products and the significant losses they cause.
How the Bans Protects Investors
Banning binary options or heavily restricting their sale and distribution to retail traders helps protect retail investors from the speculative risks associated with these financial products. Regulatory authorities have noted that binary options are often marketed as suitable investment opportunities for inexperienced traders, but their gambling-like structure leaves most traders at a loss.
The widespread existance of fraud in the binary options industry, including rigged platforms, delayed transactions, and manipulated markets, has also attracted the attention of law makers and financial authorities.
By enforcing these bans, regulators aim to:
- Prevent Fraud: Banning binary options helps protect consumers from disreputable brokers who often scam traders by manipulating prices or refusing withdrawals.
- Reduce Financial Losses: Since binary options are highly speculative, most traders lose money. Bans protecting retail traders reduce the likelihood of retail traders losing substantial funds on these risky products.