When choosing a cryptocurrency or forex broker, it is important to be conscious of whether they are regulated or not. Regulated and non-regulated brokers have different characteristics that are suited to different types of investors.
In this article, we will look at the types of financial regulators and the role they play when it comes to CFD providers.
Benefits of regulated brokers
There are four commonly referred to benefits of choosing a forex and cryptocurrencies regulated broker: transparency, security, dispute resolution, and fraud protection
Transparency
The financial services industry is one of the most heavily regulated industries in the world and the exploitation of loopholes in regulation have been the driving factors behind many global economic hits.
When a forex or cryptocurrency broker is regulated, their clients can be confident that the brokers operations are transparent and honest. Periodically, these brokers must report to the regulatory body with financial and disclosure reports.
The regulatory body conducts a rigorous analysis of the broker for them to keep their license. The regulators will look at different factors that may question the broker’s credibility, for example, manipulation of trading platforms and prices.
Security
When trading with a regulated broker, you can be sure that your funds aren’t being used to finance the broker’s operations.
Regulated brokers’ client funds are kept separate from their own capital. The segregation of funds means that your funds aren’t subject to any business risks to the broker and that they cannot be used by the broker to repay creditors should they file for bankruptcy.
Dispute resolution
Regulated brokers are required to be there when disputes need to be resolved, or their clients need help with their accounts or placing orders, etc.
This means they are usually required to have a customer support service, a displayed telephone number and email, and a real person available to assist the client. This is great as it can be frustrating when you can’t contact a company, especially when it involves your money!
Protection against fraudulent practices
When investing with a regulated broker, you can be assured that they aren’t manipulating prices or the platforms they use for trading.
This builds on the transparency factor from earlier. What you see, or are told, is real information for you to make your investment decision with.
You can also be sure that the broker will not withhold your funds from you without a legitimate reason, and that your transactions, deposits, and withdrawals will be prompt.
Why would investors use an unregulated broker?
All regulators oversee the financial services companies offer in a particular jurisdiction. Usually a country but sometimes a region or continent. You should always choose a broker that uses the regulator applicable for your country.
Below is list of just a few jurisdictions and their regulatory bodies:
- United Kingdom – Financial Conduct Authority (FCA)
- Europe – Cyprus Securities and Exchange Commission (CySEC)
- New Zealand – Financial Markets Authority (FMA)
- Australia – Australian Securities and Investments Commission (ASIC)
- United States – Securities and Exchange Commission (SEC), The Commodity Futures Trading Commission (CFTC)
- Canada – Investment Industry Regulatory Organization of Canada (IIROC)
These regulators are known as tier-1 as they offer the best regulation possible. If you are not trading in one of the these regions, it is a good idea to find a broker that will offer one of these regulators for protection.
However, sometimes your may find a broker that does not have regulation for your country or you live in a country that does not have a financial regulator. In this case the broker is either using an offshore regulator or is not regulated.
The following are examples of Tier 3 regulators:
- The Financial Services Authority of Seychelles (FSA)
- The Securities Commission of the Bahamas (SCB)
- Vanuatu Financial Services Commission (VFS)
The benefits of an offshore regulator is mostly on the brokers side. The cost of a license with these regulators is cheaper and the regulation is more relaxed. On the traders side, it means you at least get some protection.
Some brokers may not have any regulation. While it is possible that the broker offers a legitimate service, it is best to do your research before signing with an unregulated broker as they are riskier.
As a trader, the main benefit of using an offshore or unregulated broker is that they often offer higher leverage and sometimes allow you to fund your account using cryptocurrencies.
Product intervention powers
Some regulators see their role as going beyond regulating the finance services brokers offer, but also monitoring the products they offer.
European regulators such as the FCA and CySEC limited leverage rations to 2:1 for cryptocurrencies and 30:1 for major forex pairs. In March 2021, changes by ASIC to CFD trading, have brought leverage ratios in line with Europe. These limits are in place because retail traders lose more often than not and the use of leverage can result in crippling debts.
The FCA has since taken their product intervention powers a step further and placed an outright ban on the sale Cryptocurrency CFDs. Justin Grossbard of Compare Forex Brokers explains thet FCA made this decision because that there is no reliable way to determine value of the underlying crypto-asset which makes the product an easy target for financial crime and market abuse. He also explains that retail investors are vulnerable to losses as due to the extreme volatility of cryptocurrencies.
To be clear, the ban of cyptocurrency CFD derivatives does not rule out the trading of the crypto-assets, only instruments that derive their value from crypto-assets.
Regulation protects you
When choosing a CFD issuer, if possible, always choose a broker with regulation for your country. As a trader, you are looking for make profits with your trading, so it help knowing that your choice of broker is a safe and reliable with your finances.
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