US Residents are Barred From Trading Forex on Certain Trading Platforms. Why?

Sep 13, 2021 07:41 PM ET
US Residents are Barred From Trading Forex on Certain Trading Platforms. Why?

As an American, you may be amazed to learn that you may find many financial service providers operating in other countries, but not in the US. Although it is true that the United States is the primary consumer for nearly every product and service, access to some financial assets is noticeably less widespread. For example, trading in FX is easier for individual traders in Europe than in the United States. A trader has more choices when it comes to selecting brokers in Europe and many other nations than in the US. 

Though supposed to help the residents, US tax laws limit citizens' abilities to earn in their trading careers since they've created situations where an honest person who is trying to comply with the law would find themselves short of money.

Given the significant variations in trading styles and techniques among individuals, and because trading tends to be less about money and more about risk, citizens of the United States have limited options when it comes to operating in the American marketplace. A key obstacle, for example, is that people in the US have issues trading crypto derivatives.

Costly forex trading licenses

European regulatory frameworks are rather uncomplicated when it comes to brokers. Any broker can accept traders from across the EU after becoming licensed by a single authority. In short, this means that traders in EU member states can register with a German regulatory authority-licensed broker, for example, and access all the other EU markets.

Europeans may get their licenses, but in the US, the licenses are useless. The National Futures Association (NFA) regulates all brokerages in the United States. But what would lead them to not acquire a license to operate in the US? Prohibitive сapital requirements are behind this. To receive a European license, a broker must have a minimum of $100,000 locked cash. However, in the US, in order to operate, you need to have $20 million dollars in capital.

Compared to the pre- 2008 period, there are now fewer brokers accepting American customers, and the US's financial sector is undergoing considerable changes. 

CFD trading is prohibited in the USA

USA residents cannot use contracts for difference because of regulations from the Securities and Exchange Commission. In part, it's to safeguard US options markets' income by keeping traders from shifting to trading derivatives. They've used the opportunity to extend this protection into other global markets because they are presiding over a lot of the trading in other markets. They're also making an effort to keep financial markets secure by regulating derivatives.

Laws like the Dodd-Frank Act are in place to ensure the proper supervision of the financial markets, particularly when it comes to types of financial products like CFDs (Securities and Exchange Commission). The provision of this Act was the source of the authorization for the SEC to employ its powers to classify CFDs as a swap.

Following the 2008 financial crisis, significant public support has grown for more stringent regulation of the market. Under present regulatory constraints in the United States, we can't see CFDs being made available to trade for a while.

Restrictive US crypto trading

Cryptocurrency has become more heavily regulated in the United States over its short period of existence. It's tough to say for sure, but there's some evidence that suggests that regulators are to blame for limiting US participants' access to these assets.

US crypto traders have three primary exchanges to choose from. Coinbase, Gemini, and Kraken. BitMEX, Bybit, FTX, and Binance are four popular exchanges that make it known to their customers that US citizens are prohibited from using their platforms. On these platforms, derivatives, like futures and options trading, are available to help traders increase their profit low vs high leverage on forex potential.

Another popular spot-asset and derivative exchange, Binance, banned US residents two years ago. Though the reasons for the restriction weren't clear, Binance's size, the largest crypto-asset exchange in the world, indicates the gravity of the move. Binance then founded Binance US, a US branch that, albeit offering less functionality than the international version, provides a way for US customers to access Binance's platform.

Low leverage forex limits profitability

Brokers' profit grows with trader volume since brokers earn money off the volume of trade. But in the United States, leverage for big-cap companies is only 50:1 (against 500:1 in Europe), and minor-cap companies get only 20:1 leverage (versus 200:1 in Europe). Using these figures, it is evident that a broker in the US will make less than 10% of the profit than in Europe, assuming both have the same amount of customers with equal deposits.

In summary

Access to some financial assets is relatively low in the US due to the restrictions the US imposes on brokers. This, in turn, potentially hinders US residents from opportunities to earn profits.

However, there are several unregulated brokers that can more effectively handle the traders' demands in the US, given that they have low operating and legal costs. Nevertheless, never use unregulated brokers to trade.

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