Forex trading is a legal business but in some countries, forex traders can operate only through domestically licensed brokers. Forex traders are protected because laws are created for forex brokers, not for traders.
In our FAQ section in our email list, we are getting questions such as “is forex illegal” very often. We repeat again and again – Forex trading is a legal business but it must be regulated for forex brokers.
Compared to the stock market and other markets, the market for foreign exchange (forex) is unregulated in many countries. In many countries, forex trading is watching as the same as stocks trading. With advances in technology, there are major changes when compared to the Forex market a few decades ago. With the increase in internet usage and the development of new technology, there is more flexibility in Forex trading, and now it is now possible to trade in forex comfortably from home. Using the internet, high-speed electronic communication has made trading online possible.
Is forex trading illegal
Forex trading is not illegal; it is a legal business like stocks or commodities trading. However, forex brokers need to be regulated in the countries where their jurisdiction is.
Legal Forex trading
Since Forex trading is extremely risky and can cause great losses, many countries have made Forex trading illegal. Other countries have imposed major restrictions on Forex trading. Hence many people interested in Forex trading ask the question in which country forex trading is legal? While many developed countries allow citizens to make money trading in Forex, in some countries, there are many restrictions. Belarus, Canada, China, India, Japan, Iran, Pakistan, Saudi Arabia, South Korea, and Turkey are (some) countries where traders should operate only through domestically licensed brokers.
Reasons for banning Forex trading – forex ban
Safety – important reason
Trading in Forex is not safe and can cause losses. Data indicates that for retail traders, the Forex market is among the riskiest, with new traders most likely to make losses. Statistic indicate that a majority of traders fail in Forex trading. Some estimates indicate that 96% of the Forex traders make a loss and quit Forex trading. This proves that the market is very risky. However, some traders can make massive profits, if they have good skills for managing risk and a clear strategy for trading. Yet the harsh reality is that only 4% of the traders survive in the long term.
Hence many countries have made Forex trading illegal, while others have imposed restrictions on trading in Forex. Due to the high losses in Forex trading, the governments in many countries would not want their citizens to invest their hard-earned money in Forex and mostly lose it. Hence the governments in many countries are regulating forex trading and also formulating new rules and regulations for trading. The restrictions are mainly imposed because it is very risky. Forex trading risk is considered similar to gambling risk, hence to protect their citizens, prevent financial losses, the restrictions are imposed.
Traders often have the illusion that they are in control since leverage is allowed in the Forex market. Traders can use leverage to trade in Forex without having to invest the money. When leverage is used, the losses do not appear real. One of the reasons why traders are allowed leverage by their brokers is because ultimately the traders have to pay for the losses. These leverage related losses, are one of the main reasons why Forex trading is not allowed in some countries while others have strict restrictions imposed.
Fixed currencies – minor reason
The exchange rate system in a country is either floating or fixed. For the exchange rate which is floating, the price of the currency varies depending on the supply and demand for the currency. The price is not fixed, it keeps changing rapidly, based on various factors. Some countries have an exchange rate system that is fixed, and the government works with the central bank, to keep the currency price stable. This fixed currency rate system is one of the reasons why restrictions are imposed on Forex trading. Usually, countries, where the exchange rate is floating, will impose fewer restrictions while trading Forex compared to countries where the exchange rate is fixed since stable rates are important for fixed exchange rates
Is Forex trading legal in the US?
Yes, forex trading is legal in the United States. The only problem is that the majority of European and world forex brokers do not have a US trading license. US citizens need to use only American forex brokers. Forex trading in the US is no problem as a business. US government wants to keep US citizens funds to stay invested in America, not to go out in Europe, Asia, Africa, etc.
Is forex trading legal in Nepal? Yes, it is regulated and legal in Nepal as same as it is legal in Malaysia, Sri Lanka and other Asian countries.
Countries that have imposed restrictions on Forex Trading
There are some countries where citizens are allowed to trade in Forex with some major restrictions. A list of countries with restrictions is provided below
Is forex trading legal in China? Yes, it is legal and though China allows Forex trading, Chinese traders are not allowed to open their accounts with foreign brokers due to stringent controls on capital. The traders based in China are only allowed to open their accounts with Chinese brokers. To attract Chinese traders, international forex brokers can start their local branch in China.
There is a lot of competition for Forex trading in Japan for smaller traders, and the market is growing fast. The agency for financial services allows retail Forex traders in Japan to only trade through brokers who are licensed in Japan, they cannot register with other brokers. There also restrictions imposed on margin trading, typically 1:25 for major currency pairs.
Retail trading in forex is allowed in India, though it should be routed through registered exchanges only. Indian traders are not legally allowed to finalize spot transactions for currency trading. Another restriction of Indian traders is that they can only trade in currency pairs with the Indian rupee (INR) for example EU-INR, GBP-INR, JPY-INR, and USD-INR. This implies that Indian traders cannot trade in currencies pairs without the INR. This is a major disadvantage for Indian Forex traders.
The Forex restrictions in South Korea combine the restrictions of Japan and China. Due to capital controls, the traders in South Korea, cannot open their Forex account with foreign brokers. Due to the strict government regulations, there are many restrictions imposed on forex trading in South Korea by the local brokers. The maximum leverage allowed for Forex trading is fairly low at 1:10
Turkey has recently changed the law (relatively new regulations having only been introduced in 2017) for Forex trading and traders are not allowed to use the services of non regulated foreign brokers. The local broker should also get a license for dealing in Forex from Turkey’s board for Capital markets. The trader should make a minimum deposit of at least 50,000 Turkish Lira.
As we can see trading is massive business around the globe. For example, we can look at this table and stats – forex traders by country :
Forex traders by country in Europe by www.bis.org
Due to the high risk, it is advisable to understand the concepts involved before investing. Since trading is extremely risky, many countries have imposed stringent regulations on Forex trading to prevent financial losses to their citizens.