Where Are Binary Options Banned?
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Binary options have been banned or restricted in several countries due to the high-risk nature of the trading method and the prevalence of scams. Regulatory bodies worldwide have acted to protect retail investors from the inherent risks of binary options. There are also coutries where binary options have been classified as gambling and therefore falls under the gambling laws.
Binary options have been banned or restricted in many countries, including the UK, USA, Israel, Canada, Japan, Australia, and many EU membership countries.
It is important to remember, that in many countries, the binary option bans target the brokers – not the traders. Typically, bans that are enacted to protect non-professional traders do not make it illegal for a non-professional trader to engage in binary options trading. Instead, it is the broker that is breaking the law by marketing, offering and/or selling binary options to non-professional clients. With this type of ban, non-professional traders are encouraged to come forward and report brokers without fearing for their own legal situaiton.
Why are binary options banned or heavily restricted in many countries?
Each country has its own motivation, but here are some points that have played a major role in many decisions:
- Binary options are binary investment products: you either get paid or your lose the entire amount. If you had purchased stocks instead, you could have sold them when the market went against you, making a small loss but not losing your entire capital. This binary nature have caused binary options traders to lose large amounts of money in a very short time. Law makers around the world are especially keen to protect non-professional traders (retail traders, hobby traders) from this.
- While binary options can be created for long-term speculation, extremely short-term binary options dominate the market. In some cases, brokers are offering binary options with a lifespan of less than 1 minute. Combined with the binary nature of the binary option (you either get paid or lose everything), this creates a sitation that is more similar to fast gambling than actual investing. Therefore, there is a risk of gambling addiction, and some law makers have decided to classify binary options as gambling and make them fall under the gambling laws.
- The binary options market is rife with scammers. Binary options marketing campaigns tend to appeal to inexperienced traders, and many scammers are using binary options to lure in suitable victims. While a binary option can be a legitimate financial product (e.g. the binary options traded on regulated exchanges in the U.S.), the strong association between binary options and scams have given law makers a negative view of the binary option.
- Many binary options broker have deliberately acted in semi-fraudulent ways and taken advantage of the inexperience of their clients, e.g. by hiding complex information about bonus terms in the fine print, written in a way that makes it quite difficult to understand and interpret for the average novice trader.
Examples of places where binary options trading is banned or restricted
1. European Union (EU)
Many EU membership countries have bans that prevent brokers from marketing, offering and selling binary options to non-professional traders.
In 2018, the European Securities and Markets Authority (ESMA) implemented a temporary ban on the marketing, distribution, and sale of binary options to retail investors (non-professional investors/traders). This measure was introduced to protect traders from the high risks associated with these products. The ban was introduced as a temporary measure in 2018, to give the membership countries a chance to develop and enact their own national legislation.
In 2019, ESMA announced that it would not renew the temporary prohibition of the marketing, distribution or sale of binary options to retail clients in the European Union (EU). Since it was not renewed, the prohibition expired on July 1, 2019.
When ESMA decided not to renew the prohibition, most membership countries had already enacted permanent national product intervention measures for binary options that were at least as stringent as the temporary ESMA ban.
Therefore, you will now find the binary option bans at the national level, and not at the EU level.
Relevant ESMA decisions: (EU) 2018/795, (EU) 2018/1466, (EU) 2018/2064 and (EU) 2019/509
2. United Kingdom (UK)
The Financial Conduct Authority (FCA) in the UK prohibits brokers from marketing, offering, and selling binary options to non-professional traders. The ban, which was introduced in 2019, was enaced in response to widespread fraud and misleading marketing campaings that led to significant financial losses among UK traders.
3. United States (USA)
In the United States, binary options trading is heavily restricted and only regulated exchanges in the United States are permitted to offer binary options. 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).
All other forms of binary options trading, including that offered by offshore and unregulated brokers, are considered illegal. The Commodity Futures Trading Commission (CFTC) strictly regulates this area, and binary options brokers that are not approved by the CFTC are operating outside of the law.
4. Israel
In 2017, Israel became the first country in the world to impose a complete ban on binary options trading, including both domestic and international activity. The ban was a response to fraudulent companies based in Israel scamming investors worldwide. The law not only prohibits the sale of binary options to Israeli citizens but also bars companies in Israel from offering these services to clients in other countries.
5. Canada
The Canadian Securities Administrators (CSA) prohibit the sale of binary options with terms of less than 30 days to retail investors. This effectively bans the high-risk, short-term options that are most associated with scams. The CSA works to raise public awareness about the dangers of unregulated brokers targeting Canadians.
In Canada, binary options are also regulated at the provincial level, and provinces can enact stricter bans and requirements than the CSA rules.
6. Australia
In Australia, the Australian Securities and Investments Commission (ASIC) placed a ban on marketing, offering and selling binary options to retail investors (non-professional investors) in May 2021. This action was driven by concerns over the speculative and risky nature of these products, along with evidence of financial losses among Australian traders.
7. Japan
In Japan, binary options are heavily regulated by the Financial Services Agency (FSA). Only long-term binary options contracts are allowed, and the regulations include strict rules on transparency and marketing. This ensures that traders are better informed about the risks, and it effectively makes short-term binary options illegal.