This article was written by Tal Itzhak Ron and Aviya Arika from Tal Ron, Drihem & Co. Law Firm
The most interesting thing going on in the legal scene of binary options lately is the controversy among regulators about whether binary options are considered financial instruments or gambling.
Although the terminology is purely financial, some jurisdictions are still not buying it and are keen on highlighting the risky nature of the product.
Most of the regulators that are debating this question have leaned over the financial character of binary options. This includes, for example, CySEC, the Netherlands, and the UK.
In the Isle of Man, binary options were concluded to account as gambling under the applicable laws and operators wishing to license themselves must acquire a gambling license.
Interesting legal developments also occurred in the Netherlands recently, where after a long debate regarding whether binary options brokers offering short term options should acquire an additional gaming license, the Dutch court concluded that binary options are undoubtedly financial instruments covered by MiFID, and that therefore there is not much room for interpretation and no need for a gaming license.
Not a financial instrument
In Israel, the ISA (Israel Securities Authority) has also been debating what should become of binary options’ legal status. Recent debates regarding which strict limitations should be enforced on binary options in the country, resulted in the decision to completely ban this activity in Israel.
The reason for this is that the ISA has decided that binary options are not financial instruments, but gambling, and therefore regulation would not be effective and binary options can’t co-exist within trading arenas.
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The reason lies in the fundamental differences between financial regulations and gambling regulation – companies with financial licenses may not be able to protect clients, due to the complexity of the options and the difficulty to price them and also due to a multi-participant trading method that enables the operator to set the market price.
This raises the ISA’s concern that the existence of binary options in the regulated market may be a risk not only for clients (even the sophisticated ones), but also the reputation of the whole market.
Many market operators catering to the Israeli market recently decided to remove binary options from their repertoire, which led to some complications even in bodies such as the association for trading arenas, where there became a sort of division between “for” and “against” binary options.
Israel and the Isle of Man
Israel is now camping with the Isle of Man and joining a relative minority that sees no difference between binary options and gambling. Probably the truth is usually somewhere in between. It would be safest to say that binary options trading is financial entertainment. This expression allows room both for the many undeniable financial characteristics of binary options websites, as well as for the speculative, high-risk nature of the activity and the fact that the operators are in position against their traders.
The specific location of a certain brokerage on the scale between finance and gaming depends on the products offered on the website, which vary from one operator to another, such as the term of the options. Very short-term options are more likely to be viewed as gambling, because the prices fluctuate erratically, making whatever happens in the next 60 seconds or 5 minutes is highly unpredictable.
The next few years will probably show more developments on this front.
Advocate and Notary Tal Itzhak Ron is a General Member of International Masters of Gaming Law (IMGL), practicing in Hi Tech, Mobile Applications law, Digital Media, i-Gaming and Financial Entertainment law. Tal graduated from Haifa University School of Law (LL.B.) and Faculty of Computer Science (B.Sc.), and while working as a software developer at a publicly traded software company, NESS Technologies group, has further obtained a Master’s Degree in Computer Science from Bar Ilan University (M.Sc).
Offshore and Gaming Specialist Aviya Arika is a seasoned gaming entrepreneur who has been involved in the gaming and binary options industries for years. Through hands-on experience combined with legal and financial academic degrees, Ms. Arika’s areas of work extend from offshore and international finance law to regulated licensing and gaming law.