Great migration: Forex brokers and Crypto exchanges are moving to the US

The working conditions of Forex brokers and cryptocurrency exchanges are deteriorating from year to year. The authorities of many world countries are adopting laws that tighten the requirements for such sites. As the authors of such legislative initiatives explain, the new regulatory measures are aimed primarily at protecting inexperienced traders who do not have sufficient knowledge to work in financial markets and therefore lose money.

In Russia, the legislative regulation of the Forex market began to be implemented in 2016. It was then that Federal Law No. 460 of December the 29th, 2014, which received the unofficial name of “The Law on the Forex Market”, came into effect. This act assigned responsibility for controlling the activities of Forex brokers to the primary regulator in the country – the Central Bank. The law also introduced several important provisions:

• A Forex broker, not licensed by the Central Bank of the Russian Federation, does not have the right to work in the territory of the Russian Federation.
• The concept of “self-regulatory organization of Forex brokers” (SRO) has appeared. SRO, as conceived by the legislator, should prevent the failure of obligations of Forex brokers to clients. For this, the SRO forms a special fund consisting of membership fees of Forex brokers – at least two million rubles from each organization.
• Each Forex broker must have a minimum of 100 million rubles so they can pay clients the money they make.
• The maximum leverage provided by the Forex broker to the user is 1:50.
• Currency pairs are recognized as the only legal instrument of trading; all others are illegitimate.

Regulatory restrictions are becoming a reality for the cryptocurrency market. In Russia, the law “On Digital Financial Assets” is being developed, which will be a revolution for the field of digital money. The draft law stipulates that Russian citizens will be prohibited from using the services of foreign cryptocurrency exchanges and Russian companies that decide to stay in this market will face barrage requirements. Most likely, they will have to compulsorily obtain licenses from the Central Bank of the Russian Federation, enter into SROs and store large amounts of money to fulfil obligations to customers.

Such strict legislative regulation of brokers and cryptocurrency exchanges initiates the transfer of Forex market players to other jurisdictions. One of the countries to become attractive to Forex brokers in the light of recent events is the United States. We will try to figure out why this happens, and also try to predict new trends in the policies of financial regulators in different countries in the near future.

US Forex Brokers Regulation

The organizations that regulate the activities of Forex brokers in the United States are the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). The first of them, CFTC, has the functions of a regulator (that is, it issues licenses to the Forex broker and monitors their activities). The second, NFA, acts as a self-regulatory organization, where all legal Forex brokers in the USA are members.

Since 2008, CFTC has been applying to organizations wishing to obtain an RFED license (Retail Foreign Exchange Dealer – that gives the right to work in the Forex market) the following requirements:

• Minimum capital – $30 million.
• Membership of the NFA (which, among other things, involves the payment of an annual contribution of $125 thousand).
• Reporting submitted to the CFTC should be transparent.
• Maximum leverage is 1:50.

The requirements, as in Europe, are quite strict. However, there are several reasons why they are more convenient and loyal for Forex brokers:

• It is not necessary to publish profit and loss data for specific customers in the United States – it is enough to limit ourselves to the general balance sheet on the financial results of traders for a week, month or year.
• Upon termination of the activities of a Forex broker due to bankruptcy, compensation for customer deposits is not provided.
• Trading tools offered by legal American Forex brokers for their clients are not limited to currency pairs.

Thus, the migration of Forex brokers to the USA is a process that is expected to gain momentum in the near future. In a country with the largest economy in the world, unlike the European Union, there is no tendency to tighten regulatory restrictions for companies conducting brokerage in the Forex market.

And even the fact that the threshold for entering the American Forex is high enough (the applicant company must have at least $30 million) should not confuse large Forex brokers. After all, only the daily turnover of the Forex market, according to recent data, is more than four trillion dollars. And of course, not a single broker wants to lose the prospect of getting his percentage of this “pie” due to regulatory restrictions.

Strict requirements for Forex brokers in Europe

The pan-European regulator of Forex brokers, the European Securities and Markets Authority (ESMA), began operations in 2012. A few years later, this organization initiated the introduction of fundamentally new requirements for the work of companies in the Forex market. The main ones are the following:

• The maximum amount of leverage provided by the Forex broker to the client is 1:30.
• Binary options as a trading tool are prohibited.
• Information on profit and loss of customers (including cash flows on user accounts) should be published.
• Forex broker is obliged to take measures to protect users from the occurrence of a negative balance in their accounts.

The most stringent of all the restrictions presented by Forex experts was called the obligation of brokers to publish information on profits and losses of customers. In other words, brokers should tell everyone how many users manage to earn money from Forex trading. They also have to indicate what proportion of customers lose money.

The dissemination of such information pushes potential customers away from Forex trading, and even aggressive advertising, which some brokers resorted to in the first months after tightening regulatory rules, does not help.

In this regard, more and more Forex brokers are considering the United States as the country most suitable for further business. Indeed, here, unlike other territories, the regulatory requirements for the Forex market do not tighten over time, they soften.

About the author: Justin Freeman

Justin is an active trader with more than 20-years’ industry experience of working for big banks and hedge funds. He has an inside knowledge of how the financial markets work, thanks to roles including trader on a $750m Event-Arbitrage desk and CRO and COO of hedge funds running a variety of strategies. From stat-arb and trend-following CTA to fixed-income relative value. Firm’s he has worked at include big banks like Citi, and prominent hedge funds including D. E. Shaw and Millennium Capital Management.

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