The impact of the ban on binary options in Europe on their popularity

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CySEC to consider a ban on binary options altogether

The iFX EXPO is one of the best Forex expos to attend every year, and this year it was hosted in Cyprus. One of the most significant takeaways from the just concluded event was CySEC’s mention of a ban on binary options altogether. The chair of CySEC, Demetra Kalogerou was quoted saying, “We are considering banning binary options, but we are still consulting about it”. It was a major announcement for the binary options industry, especially coming from the most popular regulator in the world.

CySEC cracking down on the industry

Over the past year, CySEC along with other financial regulators have toughened laws governing the Forex and binary options industries. This was a response to the numerous claims of frauds in the industries by aggrieved clients, especially in the binary options industry.

We have already seen changes in the Forex industry that have limited the amount of leverage offered to clients and the eradication of trading bonuses. MiFID II also proposes a lot more changes, all of which aim to make these over-the-counter industries a bit more centralized. This latest comment by CySEC’s chair is the first we’ve seen regarding the binary options industry, and it has to be taken seriously.

How could a complete ban on binary options affect the industry?

If the Cyprus regulator were to impose a total ban on binary options, it certainly would affect the industry. Cyprus has become

It also would not be the first regulator to put a ban on binary options. Belgium and France have already banned all over-the-counter markets including the Forex market. Netherlands have banned all forms of advertisement on binary options and Forex. In Canada, the Canadian Securities Administrators (CSA) are considering a similar action to Netherlands’ AFM, by banning advertisements. Meanwhile, Israel’s Israeli Securities Authority (ISA) has a draft legislation that will see binary options completely eradicated from the country.

These are all part of a global war on binary options that CySEC has suggested it may join. Being the most popular regulator of binary options, a ban on the financial instrument can cripple the entire industry. However, it will certainly not kill the industry. When Netherlands banned the advertisement of binary options and Forex, the action only drove the brokers underground.

Despite the ban, brokers can still sign up clients based in Netherlands. Since the industry is decentralized, it is virtually impossible to completely shut it down. Moreover, a ban could have a negative effect in that unregulated brokers take the opportunity to fill the gap left by the regulated brokers. Therefore, a ban on binary options by CySEC may leave the traders open to solicitation by unscrupulous, unregulated brokers.

19666995 – rubber stamps marked with regulations and rules

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A better approach would be through stricter regulation, as the CFTC did. Following an overhaul on laws governing over-the-counter financial instruments through Dodd-Frank, the CFTC and SEC imposed tougher laws on the industries that scared most brokers away. Through keen supervision and tough penalties, cases of fraud were reduced, leaving only the most trustworthy brokers in operation. Right now, there are only 2 regulated binary options brokers licensed in the US, and there are few cases of fraud.

CySEC’s intentions are certainly noble as they are seeking to safeguard their residents, but a ban on binary options may not yield the best results. The good news is that they have not determined to ban the industry, yet. As the chairperson of CySEC said, they are still in consultation, probably even with some of the largest binary options brokers. If these brokers and the regulator can agree on more favorable terms, the industry may remain active, possibly even thrive, while still protecting the traders.

European Union bans binary options, strictly regulates CFDs

Vise tightens around Israeli online scammers; Israeli banks close forex companies’ accounts, and Twitter follows Google and Facebook in banning cryptocurrency ads

Simona Weinglass is an investigative reporter at The Times of Israel.

The European Securities and Markets AuthorityВ announced В that it is banning binary options and placing restrictions on the sale of contract for differences (CFDs) to retail investors.

Binary options and contracts for differences are financial products that are frequently abused by cybercriminals to perpetrate online investment scams.

Beginning in the middle of the last decade, a multi-billion dollar online trading industry developed in Israel that offered binary options, forex and CFDs to ordinary, unsophisticated investors in Israel and abroad. Much of the industry perpetuated fraud against its investors, earning money when the investors lost money. The fraudsters lied to the investors about the potential for profit and about the identities and locations of its “brokers,” and frequently disappeared with the money when investors attempted to withdraw profits.

Many binary options, forex and CFD companies have operated from Israel with no regulation whatsoever, while others found a friendly regulator in the Cyprus Securities and Exchange Commission (Cysec), which allowed them to legally offer their products throughout the European Union. Binary options were largely an Israel-centered industry while forex and CFDs are peddled by Israelis, Cypriots, Russians and others.

ESMA, the European Union’s financial regulator, said Tuesday it will publish the new rules in the Official Journal of the European Union in the coming weeks. The binary options ban will go into effect a month from the date of publication, and the new rules applying to CFDs will go into effect two months from their publication.

One industry expert described ESMA’s decision, however, as akin to “closing the barn door after the horse has escaped.” Andrew Saks-McLeod, the editor of the FinanceFeeds trade publication, has long been critical of the binary options industry and has sought to draw a distinction between those online trading websites he views as legitimate and those that are frauds.

Saks-McLeod told The Times of Israel that since Israel passed a law banning binary options in October 2020 — as a direct consequence of Times of Israel investigative reporting on the fraud — most Israeli binary options operatives have been selling cryptocurrencies instead. The ESMA’s ban on binary options, he warned, will do little to stop the phenomenon of investment scam boiler rooms operating from Israel and other jurisdictions with lax law enforcement.

“I’ve noticed most of the Israelis in Cyprus who used to sell binary options are now offering ICOs [initial coin offerings]. They don’t even need a license from Cysec to offer these products and the investor who loses all his money has no legal recourse,” he said.

ESMA’s binary options ban will consist of a “prohibition on the marketing, distribution or sale of binary options to retail investors,” according to a March 27 ESMA press release.

The contracts for differences regulation will restrict the amount of leverage that can be offered to retail investors, will not allow investors to lose more than they invested, and will prevent the use of “bonuses” and other incentives to trade. The new rules will initially apply for three months and will be extended as ESMA deems necessary.

Twitter follows Facebook and Google

ESMA’s announcement came a day after Twitter announced a ban on ads for cryptocurrencies and ICOs. The company had said it would no longer advertise binary options in August 2020.

Less than two weeks ago, the internet giant Google announced that beginning in June, it will restrict the advertising of contracts for difference, rolling spot forex and financial spread betting, as well as enforce an outright ban on advertising for binary options and cryptocurrencies.

Google’s move is perceived as the greatest blow yet to fraudulent cryptocurrency, binary options, forex and CFD websites.

Facebook banned ads for binary options, cryptocurrencies and ICOs in January.

In its press release, ESMA explained that it considered CFDs and binary options potentially dangerous to investors. CFDs pose a risk because of “excessive leverage” while binary options have a “structural expected negative return and embedded conflict of interest between providers and their clients.”

Despite the fact that Israeli law enforcement has yet to indict a single binary options fraudster, operatives are facing legal troubles from other directions.В Several alleged operatives are facing lawsuits from investors abroad. Meanwhile, Israeli banks have closed the accounts of Israel-based forex companies.

Four lawsuits have been brought against Banc de Binary and the Israeli company that operated the site, owned by Oren, Hezi and Lior Shabat, according to Israel’s corporate registry. The first lawsuit, for NIS 360,060 ($103,275), was filed by a 69-year-old man from Finland through his Israeli lawyers Adam Ashkenazi and Raouf Najar. The Finnish man lost a total of 88,250 euros ($110,000) to the company and as a result fell into a deep depression, suffered the demise of his marriage, moved out of his home, and has been compelled to return to work in his retirement.

In their response to the complaint, Oren Shabat and the local Israeli company Global App Technologies Ltd. asserted that the investor had signed an agreement acknowledging that he understood the risks involved in trading binary options. The defendants also claimed that the investor had signed a document giving up his claim to some of his money.

A plaintiff in a separate case brought by attorneys Ashkenazi and Najar is a 62-year-old musician and music teacher from Switzerland who is suing Banc de Binary and Oren Shabat for 460,168 shekels ($132,000). The amount was his pension, which he lost in its entirety.

“He lost his entire pension while the defendants live in luxurious houses and drive fancy cars,” the man’s lawyers wrote in the complaint.

In addition, two alleged victims of the binary options website TitanTrade filed lawsuits against MIG GA Marketing Finance Ltd. (which has since changed its name to Gtech Media Development Ltd), a company registered in Israel at 13 Tuval Street in Ramat Gan whose director is Guy Galboiz.

The first lawsuit was filed by a Polish woman who was suing the company for $93,000 or 358,050 shekels. Her lawyers, Nir Friedman and Yossy Haezrachy, claimed that MIG GA Marketing Finance Ltd. employed skilled salespeople who represented themselves as working for TitanTrade.В MIG GA Marketing Finance Ltd. countered that there was a lack of privity between the plaintiff and defendants since MIG GA Marketing Finance Ltd. is an Israeli company that merely provides services to foreign companies and is not the company that transacted with the plaintiff.

In a separate lawsuit, a Lithuanian man was suing Guy Galboiz and Gtech Media Development for NIS 76,720 ($22,000).

The lawsuits were withdrawn before they reached the evidentiary stage. The Times of Israel has been told that the plaintiffs requested to withdraw the lawsuits and also stated that they had no cause for action against Gtech. The plaintiffs did so because as the proceedings were commencing, the plaintiffs received all their money back from TitanTrade, even though TitanTrade was not the defendant.

Other lawsuits making their way through Israeli courts include a $382,422 lawsuit by an Australian man against Roey Shagan and Paperclick Marketing Ltd. The man claims to have been defrauded by 365BinaryOptions.com and that Paperclick Marketing ran the website.

A Canadian man is suing another Israeli company, IGMD Ltd., owned by Yehoram and Shay Hillel, for $54,436. His lawyers are Adam Ashkenazi and Raouf Najar and the man claims he was defrauded by the binary options website OptionBit.com.

Earlier this month, a Tel Aviv District Court ruled against Haim Toledano and his company Toyga Media Ltd., which is associated with the website UFX.com. Toledano had sued Israel’s First International Bank for closing his account, unlawfully, he claimed.

The bank argued that the activity in the company’s accounts raised many red flags for possible money laundering and that the bank was within its rights to close the account. The judge agreed with the bank. Israeli banks have been stepping up their anti-money laundering due diligence in the last year in an effort to comply with new laws passed by Israel’s Knesset whose purpose is to help Israel meet international anti-money laundering standards.

Toyga and Toledano are currently fighting a similar legal battle against Israel’s Mizrahi Bank, which also took steps to shut down their bank accounts. An email sent from one of the bank’s compliance officers to other staff members, that was revealed in the lawsuit’s discovery process, hints that the closing of Toyga’s bank account may not be an isolated case, and that it may become increasingly difficult for Israeli forex, CFD and cryptocurrency companies to maintain bank accounts in the country.

On November 22, 2020, Amos Lottem, a compliance officer for Bank Mizrahi told other staff members that they cannot accept further money transfers into Haim Toledano’s bank account.

“The money comes from offshore, with no explanation of its source,” he wrote, “The companies he reported receiving money from in the past operate without a license and he himself is under investigation by the Israeli Tax Authority. Until we get all the proper documents proving the source of the money and that he paid taxes on it, we cannot accept the money.”

In his complaint, Toledano disputed the bank’s findings and claimed the source of the money was dividends from legitimate business activity.

In an email dated December 13, 2020, Lottem suggested that the bank had scrutinized the activity of other forex companies as well.

“Haim Toledano has a forex company in Cyprus and he also operates ‘marketing’ and ‘call centers’ for additional forex companies. This is similar activity to the activity of IDI Ventures at Branch 36 and to RBPKR.”

The impact of the ban on binary options in Europe on their popularity

The European Securities and Markets Authority (ESMA) has agreed to renew the prohibition of the marketing, distribution or sale of binary options to retail clients, in effect since 2 July, from 2 October 2020 for a further three-month period. ESMA has also agreed on the exclusion of a limited number of products from the scope of the measure.

ESMA has carefully considered the need to extend the intervention measure currently in effect. ESMA considers that a significant investor protection concern related to the offer of binary options to retail clients continues to exist. It has therefore agreed to renew the prohibition from 2 October.

During its review of the intervention measure, ESMA considered the specific features of binary options currently within the scope of the measures. Certain binary options were found to have specific features which mitigate the risk of investor detriment, namely; they are sufficiently long-term (at least 90 days); are accompanied by a prospectus; and are fully hedged by the provider or another entity within the same group as the provider. ESMA considers that a binary option that benefits from the cumulative effect of these three criteria is less likely to lead to a significant investor protection concern.

In addition, products that at the end of the term have one of two predetermined pay-outs, neither of which is less than the initial investment of the client, will be excluded. The pay-out for this type of binary option could be the higher or lower one but in either circumstances the investor would not lose money compared to their total investment. As the investor’s capital is not at risk these products should be explicitly excluded.

Hence, ESMA agreed to exclude from the scope of the renewal the following binary options:

  • a binary option for which the lower of the two predetermined fixed amounts is at least equal to the total payment made by a retail client for the binary option, including any commissions, transaction fees and other related costs; and
  • a binary option that meets cumulatively the following three (3) conditions:
    • (a) the term from issuance to maturity is at least ninety (90) calendar days;
    • (b) a prospectus drawn up and approved in accordance with the Prospectus Directive (2003/71/EC) is available to the public; and
    • (c) the binary option does not expose the provider to market risk throughout the term of the binary option and the provider or any of its group entities do not make a profit or loss from the binary option, other than previously disclosed commissions, transaction fees or other related charges.

ESMA will continue to keep these products under review during the prohibition period. The renewal was agreed by ESMA’s Board of Supervisors on 22 August 2020.

Next steps

ESMA intends to adopt the renewal measure in the official languages of the EU in the coming weeks, following which ESMA will publish an official notice on its website. The measure will then be published in the Official Journal of the EU and will start to apply from 2 October 2020 for a period of three months.

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