As explained before, binary options trading was done as over-the-counter transaction that had minimum regulation. Since binary options have become one of the most popular types of trading options, many are concerned if binary options are legal in EU or USA, or in any other country of residence. Nowadays binary options are not OTC transactions they are rather traded on exchange, which means they are well regulated.
Since recent financial crisis that has hit the world many investors are still hesitant to invest in new markets, such as binary options. This caution is understandable, but still unnecessary. Brokers respect regulatory framework of country in which they are operating, for example if investor decides to withdraw his/her money from binary options broker, broker will ask them for a copy of photo ID and proof of address. This is done due to regulations such as America’s Patriot Act from October 2001. This act is supposed to prevent terrorism, fraud and regulate international transactions.
Each broker has some additional security checks to make different kinds of abuses less likely(e.g. money laundering). Additional check are a sign of a serious broker.
Most popular location for binary brokers these days is Cyprus. This fact is one more reason for investor’s caution. Although again, this caution is really un called for. Many think that brokers choose Cyprus as their base of operations because of loose regulation in that country, but that is not really truth. Actually Cyprus is country with one of most advanced regulations when it comes to dealing with binary options trading. Since Cyprus is member of EU it applies EU’s Markets in Financial Instruments Directive (MiFID). MiFID has main goal of making sure customers are protected, also it integrates various financial markets into a single market. Republic of Cyprus is in full compliance of the MiFID, under the Investment Services and Activities and Regulated Markets Law 144(I) of 2007. This means that Cyprus has more strict regulation that UK for example. UK doesn’t comply to MiFID since it is not in monetary union.
Brokers choose Cyprus because of its low taxation. Corporate profits are taxed by 10% in Cyprus, while same tax is at 24% in UK and even higher in USA, where companies can be taxed as high as 35%. High taxation is main reason why many brokers refuse to accept clients from American market they simply don’t want to be taxed by U.S. authorities.
Cyprus Securities and Exchange Commission (CySEC) is regulatory body of financial markets in Cyprus. CySEC is empowered to act under the financial regulatory framework. For example on May 3, 2012 CySEC announced policy change, meaning that from that date binary options are treated as financial instrument. Thanks to that Cyprus was first EU MiFID memeber to treat binary options as financial instrument. Also in 2013 CySEC has published press release to warn investors about certain binary options broker that wasn’t licensed by CySEC. By such actions CySEC makes sure market game is played fair and square, while at the same time makes sure investors are protected.
Sadly, binary options are not treated as financial instrument everywhere. In U.K. they are regulated under the U.K. Gaming Commission where binary option trades are actually as “bets”. This fact is quite absurd and creates whole set of problems, e.g. gambling debts are known as “debts of honor” in U.K., which means that they can’t be enforced in the court. So if you trade binary options under U.K. jurisdiction and brokers refuses to pay you your earnings, you can force him on court to pay you, since it is according to U.K. regulations “debt of honor”.