Fraud involving binary options, CFDs on cryptocurrencies sparks German Police concerns

Maria Nikolova

The warning is published less than a week after the German Federal Financial Supervisory Authority unveiled its plans to introduce a ban on binary options.

The rising number of cases of online fraud involving binary options and CFDs on commodities, FX and cryptocurrencies have sparked the concerns of Germany’s Bundeskriminalamt (Federal Criminal Police Office). Earlier today, the Police, along with the German Federal Financial Supervisory Authority (BaFin), published a special message to the public, warning about online investment scams.

In particular, the regulator and the police are concerned of the activities of scammers that lure their victims via the offer of “simple and safe” trading in binary options and CFDs on cryptos. The typical fraudsters do not explain how the trading exactly works and often provide investors with fake account statements so that they are misled to believe that they are making profits whereas, in fact, their money is usually transferred overseas by the fraudsters. The fraudulent entities most often are unauthorized to conduct any financial services business in Germany, the Police warn.

BaFin points out that when trading CFDs and binary options, there is always a high risk of loss. The regulator reminds the public that there is a ban on the offering of binary options and that there are restrictions on the offering of CFDs to retail investors.

Last week, BaFin presented its plans for a national prohibition on offering binary options to retail clients. The German supervisor is thus preparing for the expiry of the product intervention measure introduced by the European Securities and Markets Authority (ESMA).

In particular, BaFin sees risks and thus considerable investor protection concerns in that binary options are complex and lack transparency. The regulator notes that, unlike other financial instruments, binary options are not traded on a market where prices result from supply and demand. Instead, it is the provider who determines the price, without its clients being able to understand or examine this. Due to the generally extremely short terms, it is exceedingly difficult for retail clients to accurately assess the risk-return profile.

Furthermore, binary option providers usually act as the direct counterparty to their clients’ trades. The interests of providers thus directly conflict with those of their clients. For instance, providers could manipulate the price of the underlying at expiry of the binary option or change the term of the binary option by seconds or milliseconds, so as to avoid having to pay out on the option contract.

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