In January, the FBI and the US Securities and Exchange Commission met at The Hague with law enforcement officials from 20 countries to discuss strategies for combatting binary options fraud worldwide. The binary options industry emerged from Israel nearly 10 years ago and has scammed hundreds of thousands of people across the globe out of billions of dollars. It is now estimated that there are more than 100 companies operating out of Israel, most of which are fraudulent. The Office of Israeli Prime Minister Benjamin Netanyahu made a statement last October urging a global ban on binary options saying, “Taking advantage of innocent people who are not aware of the risks they are taking is unscrupulous.”

What are Binary Options?

A binary option is a type of options contract in which the payout depends entirely on the outcome of a yes/no proposition, most commonly, whether the price of the particular asset that underlies the binary option will fall above or below a certain price at a certain time. For example: whether the price of gold will be above $1,257.60 at 11:30 on a certain day, or if the price of XYZ company stock will exceed $22.80 tomorrow at 1:15. When the option expires, the option holder either receives the predetermined amount of cash associated with the option, or nothing at all. Once the option is purchased, it cannot be sold.

If you think this sounds more like gambling than investing, you’re not alone. Investment guru and author Gordon Pape wrote in Forbes Magazine, “The sites [binary options trading platforms] appeal to the same type of people who play poker online. But they somehow have an aura of being more respectable because they represent themselves as offering a form of investing. Don’t kid yourself. These are gambling sites, pure and simple. It’s probably just a matter of time before regulators move in on them.”

The Fraud

Most of the binary options market operates through online platforms, many of which are not in compliance with US regulatory requirements. The SEC and Commodity Futures Trading Commission (CFTC) warn of three categories of fraud most commonly reported against Internet-based binary option trading platforms:

Refusal to credit customer accounts — When customers attempt to withdraw their initial deposit or returns on their investments, withdraw requests are cancelled and their calls and emails are ignored.

Identity theft — Some complaints allege that trading platforms may be collecting personal information for unspecified uses. The SEC warns not to provide copies of credit cards, driver’s license, or passport.

Manipulation of trading software — Software is manipulated to turn winning trades into losing trades.   For example, the countdown on a winning trade may be arbitrarily extended until the trade is a loss.

If you are considering investing in binary options, particularly though an online platform, check first to see if that platform is registered with proper regulatory authority — for securities, as an exchange with the SEC, and for commodities, as a designated contract market with the CFTC. Caveat emptor—let the buyer beware.

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