[Shaswat Kashyap is a 3rd-year student at Gujarat National Law University and Snigdha Dash a 3rd-year student at National Law University, Odisha]
A post late last year on Money Control highlighted a disquieting trend where certain financial influencers (finfluencers) are endorsing binary-trading platforms that the Reserve Bank of India (RBI) has blacklisted. Social media profiles with significant following actively promote electronic trading platforms (ETPs). These platforms facilitate the trading of binary options in forex derivatives. They pose a significant risk to investors, as engaging with them could result in severe consequences. Investors may find themselves subject to penalties of up to three times their invested capital or even face imprisonment for violating the Foreign Exchange Management Act (FEMA).
In this post, the authors aim to shed light on binary trading options and the relevant regulations. Additionally, the post will delve into the potential repercussions that investors might encounter when choosing to invest in such platforms. The goal is to provide a clear understanding of the risks associated with these activities and encourage informed decision-making among investors.
Binary Options Trading in India
Binary options, also known as ‘all-or-nothing options,’ operate on a simple ‘yes or no’ premise. Traders bet on the future price movement of an underlying asset, predicting whether it will rise or fall within a fixed timeframe. The outcome results in either a fixed pay-out or nothing at all if held until expiration. In binary options trading, a trader chooses between ‘buy’ or ‘sell’ options, wagering on whether the asset’s price will go up or down. If the option expires ‘in the money,’ meaning the asset’s price closes higher than the ‘strike price,’ the trader earns a fixed amount. Conversely, if the option is ‘out of the money,’ with the strike price higher than the asset’s closing price, the trader receives nothing.
These options go by various names like digital options, all-or-nothing options, one-touch options, fixed-return options, and bet options. Traders engage in binary options across different securities, with forex being a common domain, involving major currencies like USD, EUR, GBP, JPY, and AUD.
In India, binary options trading exists in a legal grey area. The RBI prohibits foreign exchange and binary option trading online. Although the legality remains unclear, current regulations do not endorse binary options trading. The RBI and the Securities and Exchange Board of India (SEBI) neither endorse nor regulate this form of investment.
While binary options trading itself is not against Indian law, any specific rules or regulations governing it are absent. The central bank permits resident citizens to undertake forex transactions through authorized platforms for permitted purposes. Notably, several platforms, despite heavy advertising, lack authorization and appear on the RBI’s non-exhaustive list of unauthorized ETPs.
To safeguard investors, the RBI regularly updates an Alert List of unauthorized forex trading platforms. The list ensures that only 56 platforms authorized by the central bank are permitted for forex exchange transactions. Investors are generally advised to be aware of authorized platforms and exercise caution to avoid unregulated or unauthorized binary options trading platforms.
Cross-Jurisdictional Analysis
Binary options trading is permitted and regulated in various countries, each with its own set of rules and oversight. In Singapore, the Monetary Authority of Singapore (MAS) oversees binary options trading, and traders are advised to use MAS-regulated brokers for added protection.
In the United States (US), binary options trading is highly regulated by the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), which oversee financial securities, stock exchanges, and options and futures markets. Binary options are legal, but they must be traded on regulated US exchanges known as designated contract markets (DCMs). These exchanges are subject to oversight by the CFTC or the SEC, ensuring a level of regulation and protection.
The United Kingdom has a complex history with binary options. In 2019, the Financial Conduct Authority (FCA)banned the sale of binary options to retail consumers due to concerns about significant investor losses. Despite hopes for a regulatory change post-Brexit, the ban was maintained by the FCA to prevent unfair losses for traders.
In Japan, binary options are legal and regulated. The Financial Services Agency in Tokyo monitors the entire financial system, including accounting, banking, and insurance. Additionally, the Securities and Exchange Surveillance Commission ensures that firms comply with regulations, providing a comprehensive oversight framework for binary options trading in Japan.
In 2019, the Australian Securities & Investment Commission (ASIC) conducted a survey revealing a significant financial impact on binary options traders. The survey indicated that an alarming 80% of binary options traders ended up losing their invested capital. In response to these findings and to address the risks associated with binary options trading, ASIC took regulatory action by implementing a ban on binary options trading. This ban is set to remain in effect until the year 2031, reflecting the serious concerns about investor losses and the need for protective measures within the financial industry.
Investor Concerns
Binary options carry inherent financial risks, often attracting inexperienced investors. Many investors in binary options encounter financial setbacks. What adds to the investors’ financial concerns is the risk of legal consequences. Residents engaging in forex transactions for purposes not permitted under FEMA, such as using ETPs not authorized by the RBI, may face penal action under the FEMA. Such transactions could be viewed as trading in forex derivatives using unauthorized platforms. According to FEMA regulations, only transactions entered into through authorized ETPs are permissible, emphasizing the importance of conducting transactions through approved channels to avoid legal repercussions.
Conclusion
The proliferation of unauthorized forex, contracts for differences and binary trading platforms has emerged as a significant concern in India. These platforms, frequently promoted on platforms like YouTube and various social media channels, engage in proscribed operations. Not only do they disseminate misleading information, but they also entice unsuspecting individuals with risky leverage. It is crucial to emphasize that trading on such platforms could raise questions regarding their legality, potentially violating the guidelines outlined in FEMA. Engaging in such activities can lead to legal consequences and financial penalties.
To mitigate potential risks, it is crucial for individuals to verify that their selected broker operates under the regulation of a recognized financial authority. This regulatory supervision adds an extra layer of security, ensuring the broker complies with rigorous standards of transparency and fairness. Providing education to retail investors regarding the advantages and disadvantages of various trading options plays a vital role in empowering them to make well-informed decisions.
– Shaswat Kashyap & Snigdha Dash