Binary Options Become Illegal in Europe

Binary options are popular financial options in which the payoff will either be nothing or a fixed monetary amount, with the pay-out either cash or an asset. Over the years, binary options have faced a great deal of controversy due to the possibilities of fraud. Because of this, many jurisdictions ban binary options, considering them a type of gambling. One example is the European Union that made the sale of them illegal in Europe.

The announcement of banning of binary options came in March 2018 under the regulations of the European Securities and Markets Authority, also known as ESMA. The changes to the regulation placed a ban on the sale, marketing, and distribution of binary options for retail investors. The ban on binary options came into effect on July 2.

At the same time that EMSA banned binary options, the organization also placed restrictions on sales, distribution, and marketing of Contracts for Differences (CFDs). Included are a leverage limit for opening positions, negative balance protection, preventing incentives from CFD providers, and a rule for margin close out based on each account. These new rules for CFDs came into effect a full month after the ban on binary options.

Both the ban on binary options and the strong restrictions on CFDs resulted from concerns related to investor protection. ESMA, as well as the National Competent Authorities (NCA), concluded that binary options pose a significant concern due to their complexity, as well as a lack of transparency typically associated with these investment tools.

Additional concerns related to both binary options and CFDs arose because cybercriminals frequently target these financial products using online investment scams. Despite this, many areas of the EU have not had any regulation in place for binary options. Many other companies have taken advantage of the relatively light regulations from the Cyprus Securities and Exchange Commission (CySEC) since this organization allows businesses to operate throughout the EU.

It is important to note that according to MiFIR regulations, ESMA only has the authority to place a temporary intervention, such as the binary options ban, lasting three months. At the end of that period, they must extend the intervention.

The various national securities regulators within the European Union will pay close attention to how these measures impact the markets and investors, allowing them to take the appropriate follow-up action. The ability to ban risky products is relatively new for ESMA, as the authority only gained that power in January. The binary options ban marks the first use of this new power.

While some traders feel upset about the ban on binary options, others have minimal concerns. Those traders invested rarely in binary options due to the complexities in selecting the final expiry. Instead, they selected other financial instruments. With the ban on binary options, more traders will likely turn to CFDs. Although these have stricter requirements, they are still readily available and can lead to large profits with a proper investment.

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