Binary options are a hotly debated topic these days. The United States is at this moment the largest binary options trading market on the globe. This is despite the fact that most of the companies that accept the registration of USA binary options traders are not respecting US laws.
Since this topic is so popular I’ve decided to research it and figure out what exactly the current US laws and regulations say about binary options.
How does it work?
First, I’d like to clarify what binary options are. Binary options are a form of on line trading where you will have to predict the future movement of financial assets. For example, if you think that the value of silver will decrease within the next few hours and then you will be able to open a bet that will pay out if your prediction becomes true.
What do the US laws say
According to current US trading laws related to binary options trading, only binary options exchanges are allowed in the United States. Exchanges are brokers that allow traders to bet against each other (exchange bets) rather than bet against the broker itself.
This means that the company offering binary options does not have a clear incentive to determine their customers to lose. The broker will make money by charging a certain commission on traders’ bets rather than confiscate the money traders lose with their unsuccessful bets.
S-called “off-exchange” brokers, brokers that require traders to bet against the broker itself are at this moment not legal in the United States. The US is pretty much the only country that does not allow off-exchange brokers while most others that have binary options laws allow both types.
So, this is basically how binary option are regulated in the US.
Brokers that accept USA clients
At this moment only the company NADEX is licensed to offer binary options in the United State. However there are still many offshore binary brokers that accept USA traders, as seen on the linked website, even though they do not have necessary binary options licensing.
These companies can access the USA market because they operate in offshore jurisdictions meaning that they can get away (to a certain extent) with circumventing United States laws. Technically, these companies would be directly breaking the law if they would be operating from the territory of the US.
The vast majority of these brokers also function on the off-exchange model that at this moment is not legal in the United States. While not all of these companies are illegal or a scam, it’s generally a bad idea to register and deposit money on a website that does not have any form of licensing or regulation. In fact, the SEC gave out last year a warning telling people not to register at such brokers.
Is it illegal for individuals to trade?
It is not illegal for individuals in the United States to trade binary options even if this happens at brokers and companies that are not licensed and regulated in the United States. The laws according to which companies are required to operate on the exchange model refer only to the companies themselves.
What the above means is that it’s the companies’ liability to respect this law. If a trader registers at a broker that operates outside of the law then only the company itself can face legal consequences and not the trader.
However, obviously you should not register and trade at companies that are not regulated or licensed even though there will be no legal consequences for you. An unregulated company poses the risk of being a scam since it’s not bound to any laws and rules in the first place.
Will the laws change in the future?
Many off the offshore companies that currently do business in the US without a license accuse the US of implementing regulations that intentionally block these companies’ access to the market.
Some offshore binary options companies commented that they would gladly apply for a legit US trading license if only the country’s regulations wouldn’t be constructed to apparently give an unfair market advantage to US trading companies.
These companies claim that even if they abide by all safety and security regulations present in the US they would still be denied a license for a variety of seemingly irrelevant reasons in order to prevent them from becoming a serious competition to current US-based brokers and trading companies.
Some voices claim that unfortunately the unfair nature of the current US binary options regulations will not change as business and financial interests in this industry are simply too strong to allow this to happen.
So this leaves US traders either to trade at the current US government-created binary options monopolies or not trade at all. Trading at offshore brokers is simply too risky even though from traders’ end it’s not illegal.