A wave of new unregulated brokers has started to appear in the industry in the aftermath of the cryptocurrency boom. While the price of Bitcoin has settled below $7,000 on a sustained basis, new crypto brokers are growing like mushrooms and their operating ways sound strongly familiar to the wild west days of the binary options industry.
The risks for the broader cryptocurrency market are material as the hot sales tactics employed by such firms have already attracted the attention of the FCA. These so-called brokers are also likely to thrive in an environment where the price of Bitcoin is constantly falling (more or less).
At least one former technology provider for binary options brokers has been offering long-only exposure to crypto assets. If the ways of the binary options industry translate into the crypto brokerage space, the regulatory attention is soon likely to become materially higher and pressure on brokers who are offering cryptocurrency trading is certain to increase.
Unregulated Brokers Flourishing
The obscure jurisdictions from which such companies are operating are likely to deter that part of the population which has some experience in dealing with financial assets. However, just like with binary options, promises of unrealistic returns are likely to lure in a slew of unsophisticated investors.
Call centers from outside of the EU are working actively to lure in clients that are usually subjected to outrageous commissions and spreads which are poorly disclosed and frequently manipulated. In tandem with the decline in the price of a given asset (especially cryptocurrencies these days), quick losses mount to drive down the value of the account quickly.
Liquidity Constraints in 2021 – What is the Best Path Forward?Go to article >>
The key point which sales reps are usually omitting for the clients are outrageous swap rates which are charged on the accounts. Ranging from 200 to 500 percent per annum, every client that is willing to “buy and hold” is sure to be left out with nothing until he or she waits for the rally in a given cryptocurrency.
The issues relating to such companies are likely to get exacerbated by the harsh regulatory changes to the industry in the EU that puts clients at risk with dealing with unregulated brands. Instead of protecting retail investors, the ESMA has exacerbated a longstanding problem for the industry – competition from unregulated providers.
Reminiscence to Binary Options Brokers
The actions of such brokerages are mimicking the dawn of the binary options industry. With the regulatory framework for trading forex set for a big change and the lack of defined rules for cryptocurrency trading, the risk is that such companies are likely to draw from the potential of the crypto industry as a whole.
During the past 24 hours, the FCA has issued several alerts against unregulated brokers. The companies that are mentioned are Novatrades, IDBTrades, Safemarkets, Brokers Station, Noble Capital House (NBH). The names of the brands speak for themselves, alluding to the wild west times of the binary options industry. Unfortunately, its regulation didn’t change much of the conduct with EU regulators being helpless to prevent numerous consumers from being misled that they are investing their hard-earned cash.
Brokerages using cheap technology from technology providers which are usually heavily connected to the binary options industry are very likely to cause irreparable damage to the future value of companies from the trading industry that are adhering to fair conduct. After all companies like these encouraged systemic misbehavior on part of regulated brokers especially in jurisdictions in the periphery of the EU.
A number of companies are heavily investing in such licenses once more with the Bulgarian Financial Services Authority being the latest trendy place among companies looking for a cover of their poor market conduct towards the end client.