Israel’s online industry post binary options

By Contributing Author

The somewhat nefarious world of binary options has always had a fraught history in Israel, even before the Knesset voted in October 2017 to outlaw the industry in its entirety.

As long ago as 2014, concerns were expressed that much of the country’s internet and tech boom was actually taking place on the back of dubious binary options and forex companies, with 15 of the 90 Israeli businesses earning more than $10 million annually at the time being online trading platforms.

Then in June of 2014, the Israel Securities Authority (ISA) felt compelled to issue a warning about the dangers inherent in trading in forex and binary options, or what it termed “unregulated investments”, following this up in November with increased supervision and licensing of firms offering online trading platforms.

In early 2016, the ISA went further, saying that it found binary options trading to be in essence gambling, and so its marketing to Israelis was subsequently banned on ISA-regulated trading platforms.

The ultimate fate of binary options traders was then finally sealed in October this year with the Knesset’s decision that binary options were no longer permitted to be marketed to foreign clients outside of Israel either. Any companies doing so had three months in which to wind up their operations, and now individuals found working in the industry can be jailed for up to two years. However, despite ongoing concerns, forex and CFD (Contract for Difference) trading are still allowed.

There is no doubt that the many scandals surrounding binary options trading have damaged Israel’s securities industry in the world’s eyes. But there are those who argue that a number of other online industries offering services that are illegal in Israel to people who reside outside of the country should also come under the same sort of scrutiny and regulation.

Notably, Israel tech firms lead the world when it comes to online gambling, with a number of powerful companies who dominate the industry globally, including major games producers such as Playtech and 888, and online casino and sports book operators like William Hill, being based here.

And with them come a number of subsidiary industries, most significantly advertising and promotions specialists and affiliate marketing sites like Playright, which refer players legitimately to online gaming operators.

However, comparisons between online gambling and associated companies, and trading platforms dealing in binary options, are not reasonable, as the major difference between the two industries is very clear. The former is open about the fact that what it sells is gambling; the objection to the latter has always been that it markets binary options as a legitimate financial investment and so has misrepresented itself to clients and to the world. The risks when you put your money into an online slots game are obvious, but the potentially far greater risks associated with binary options have often been deliberately and calculatingly withheld from clients — and that is the very real difference.

And while some have argued that it is hypocritical for companies based in Israel to be making fortunes by offering gambling services from within a country where those same activities are considered to be beyond the pale, this view misses the point. The argument has not so much been about whether binary options and forex trading is a form of gambling, rather that the platforms offering them dressed them up as legitimate financial instruments, and employed a vast array of underhand and deceptive practices to sell them. Israel’s booming online gambling industry is upfront about who it is and what it does — people may not like it, but there is no mistaking what they do.

It is also worth noting that Israeli online gambling companies are not operating in markets where gambling is illegal — businesses like Playtech and 888 provide services to highly regulated markets like the UK, where all online casinos are licensed by the UK Gambling Commission, as well as ‘grey’ markets like Australia, where it is not illegal for residents to play at online casinos, only for them to be operated from within the country’s borders. On the other hand, in the majority of states in the US, for instance, or other countries where online gambling is illegal, you won’t find any Israeli gambling operators doing business. Unlike binary options trading, online gambling is highly regulated and Israeli companies operate entirely within a legal framework.

Why was binary options trading outlawed in Israel?

There are two main reasons for the banning of Israel’s binary options trading platforms — the product itself and the behavior of those selling it.

The ISA’s assessment of binary options trading as being more akin to gambling than financial investment was a sound one. Binary options essentially involve a client taking a position on a commodity, currency or stock rising or falling, relative to its starting price and within a given time frame, which can be anything from a few minutes to a few months. The client agrees a set return in advance, and if the stock or commodity that is being bet on rises or falls as the client predicts, they win; if not, the trader wins.

However, the most pernicious aspect of binary options is that the client can only ever win a set amount from the deal, which will always be less than they wager, while the trader will take the whole amount if the bet doesn’t come off.

Also, owing to the often very short timeframes involved, binary options trading essentially requires no skill or no industry knowledge — it is more or less a punt, hence the assessment of it as being gambling rather than investing.

But in the end, it was the behavior and practices of binary options trading platforms that ultimately led to their demise. As a result of traders manipulating prices, withholding money from clients, convincing people to over-invest, and using nefarious high-pressure sales tactics, hundreds of thousands of people around the world were defrauded by Israeli traders, with losses thought to run into billions of dollars, much to the detriment of the country’s securities industry and its global reputation.

What does the future hold for online trading platforms?

So, what does the future hold for the large number of Israeli trading platforms who previously marketed binary options? In some cases, it will be prison for their leading figures, such as Lee Elbaz, CEO of Yukom, who faces a twenty-year jail term in the US (as might others who have worked in the industry if they venture to the States). And with America’s decision also to take a much tougher line on the industry, it’s hard to see any future in Israel for these sorts of companies — unless they begin to delve, as many suspects they will do, into the world of cryptocurrencies.

This is latest sector of the online trading market to come under scrutiny for the potential it provides for unethical operators to rip off clients.

On the back of the success of Bitcoin, cryptocurrency exchanges have sprung up where clients can buy and sell not only Bitcoins, but other emerging currencies such as Litecoin and Ethereum. However, as Shmuel Hauser of the ISA has warned, unscrupulous traders once in the binary options business may potentially be moving into cryptocurrencies, attempting to profit from dubious but unregulated Initial Coin Offerings (ICOs), or market manipulation through ‘pump and dump’ strategies, where insiders conspire against regular clients in order to artificially inflate prices and then unload quickly at a profit.

One of the difficulties in tackling potential new scams, however, is determining what comes under the jurisdiction of the ISA, and what can be classified as fraud, meaning that it falls to the police. It is to be hoped that any gaps that emerge between the two do not allow unscrupulous fraudsters to slip through once more.