page title icon Pros and Cons of Trading with Unregulated Offshore Forex Brokers

November 22, 2022

Most forex traders have one very important decision to make before they sign up with a forex broker. Will they trade with a regulated broker or an offshore broker? 

Before we get into the risks and rewards of using an offshore broker, I’m going to interject my own opinion—you should always trade with a regulated broker. Forex trading is risky enough as it is, without adding the risk that your unregulated broker will run off with your deposit.

However, it is clear from the popularity of offshore forex brokers that many traders are comfortable with this additional level of risk. Why would anyone deposit money with unregulated forex brokers? Well, despite significant risks, there are a few advantages.

What is an “unregulated,” offshore forex broker?

Many countries have strict regulations in place to govern forex brokers. The regulations may be overreaching at times, but they are designed to protect traders. Some forex brokers skirt these rules by operating their brokerages from countries with very little oversight. From these “offshore” locations, they offer their broker services to anyone in the world, without abiding by complex regulations. 

Forex brokers in the US, for example, are beholden to the guidelines of both the CFTC (Commodity Futures Trading Commission) and the NFA (National Futures Association.) These two agencies have very strict rules regarding capital requirements, transparency, and which financial instruments a broker can offer. 

Compare this regulatory environment to that of the far-flung country of Vanuatu, which is home to a number of forex brokers. These brokers fall under the jurisdiction of the Vanuatu Financial Services Commission, which is far more lax in its oversight. Offshore brokers operating from Vanuatu can offer much higher leverage, trade riskier financial instruments, and charge less due to a lower cost of compliance.

A quick note of clarification: Traders often use the terms “unregulated” and “offshore” interchangeably, but most offshore brokers technically aren’t completely unregulated. Many abide by the minimal regulations established by the least mindful government they can find.

Advantages of using an offshore forex broker

On the surface, there are a number of advantages to using an unregulated forex broker. Lurking below the surface (picture the poster from Jaws) is the ever-present danger of forex scams, lost deposits, poor trade execution, and other perils. 

I’ll temporarily ignore what lurks below and start with the advantages.

Enormous leverage

This is probably the first thing that comes to mind when forex traders think of offshore brokers. The leverage is incredible—500:1, 1000:1, even 2000:1 in some cases. Compare that to regulated forex brokers in the US, who can only offer a maximum of 50:1 leverage. 

The reason the US limits leverage on retail investor accounts is that many traders were using their leverage irresponsibly and lost substantial amounts of money. Too much leverage in the hands of an inexperienced trader can lead to financial ruin. 

If you’re just getting started in the foreign exchange market, I urge you not to simply seek out the highest leverage. Trade within your means.

CFDs and other high-risk financial instruments 

There’s a number of different ways to participate in the foreign exchange market and one of the most popular is through CFDs. CFD stands for Contract for Difference and is a type of derivative that allows you to take advantage of price movements. 

The benefit of trading CFDs is that you don’t actually purchase the underlying asset. This allows you to take on large positions without forking over a lot of money. (Basically, another form of leverage.) 

CFDs can be highly profitable, but are also very high risk. So high risk, in fact, that regulated forex brokers operating in the US are not allowed to offer them. American traders are locked out of a market that has really blown up in the past few years. 

Some unregulated brokers fill that void and offer CFDs to all their clients, regardless of their country of residence, but technically Americans are prohibited from trading them.

No restrictions on trading styles

Regulated brokers often prohibit certain trading styles. If you want to use a trade copier or expert advisor (EA), or if you’re a scalper, you might not be able to trade with a regulated broker. With some exceptions, most unregulated brokers permit all trading styles. 

Less paperwork for sign-up

If you’ve looked into the sign-up process with a regulated forex broker, you’ve probably come across the acronym KYC. KYC stands for Know Your Customer, and it refers to the requirement that most regulated financial institutions must verify their client’s identity and address before issuing an account. 

The KYC protocols have been designed to curtail money laundering, but they also mean additional paperwork for everyone else. 

Rather than just allowing you to make a deposit and get started, regulated brokers require you to upload copies of government issued IDs, as well as bank statements, utility bills, or something similar to verify your address.

Some offshore brokers have the same requirements, but many do not. With an unregulated broker you might have to provide an ID but not an address verification. 

Tighter spreads

Abiding by complex regulations is expensive. Regulated forex brokers need to pay dues to their regulators, hire compliance officers and lawyers and spend a lot of time and resources on transparency. 

Guess who pays for most of that? You, the trader. 

Without these significant expenses, unregulated forex brokers are able to provide tighter spreads and lower commissions, which means traders keep more of their profits. 

In the forex market, where spreads are typically extremely tight, the price difference might not seem significant, but it does add up, especially if you’re a high-volume trader.

No regional restrictions

Due to the great variance in regulations between countries, many forex brokers don’t accept clients from countries beyond their home region. For example, most European brokers don’t accept American clients and vice versa. 

Additionally, many forex brokers are based in countries that are engaging in economic sanctions against other countries, so some traders are locked out of the forex market for political reasons. 

Most offshore brokers, on the other hand, accept traders from all over the world.

Sign-up bonuses

Many unregulated brokers feel the need to entice traders with welcome bonuses. You should probably ask yourself why they have to do that, but we are still in the “advantages” section. 

Often the welcome bonuses are in the $30 range, but some unregulated brokers will offer you a bonus based on how much you deposit. Deposit $1,000, and they’ll put $1,200 in your account, for example. There’s always various strings attached to such offers, so don’t be easily enticed. 

Disadvantages of using an offshore forex broker

That looks like a lot of advantages, but to continue the Jaws analogy, things were looking pretty rosy on the beaches of Amity Island too. The trouble with unregulated brokers is that when things do go wrong, they tend to go spectacularly wrong. Man-eating shark wrong. Your money has disappeared wrong. 

No deposit protection

Most regulated brokers have certain capital requirements. For example, in the US, the NFA requires member forex dealers to have a minimum of $20 million on hand. Capital requirements are required in order to serve as a sort of emergency fund to keep a broker solvent should something go wrong. 

That doesn’t mean regulated brokers don’t face insolvency, but when they do, the proper authorities step in and traders have a level of protection. A good example is the sudden demise of Alpari UK, a subsidiary of the Alpari Group. In 2015, massive losses resulted from the Swiss National Bank’s decision to abandon its cap against the Euro. Alpari Group declared bankruptcy, but thanks to the intervention of the FCA (the UK’s Financial Conduct Authority), traders were still protected to a degree and received $0.82 on the dollar for any deposits they had.

Compare that to the case of Gallant Capital Markets, an “unregulated” broker based in the British Virgin Islands. In 2017 they also declared themselves insolvent. The bankruptcy revealed a complicated ownership structure that involved a possible pyramid scheme and the arrest of a Czech man who may or may not have held a controlling interest. Five years later, bankruptcy officials are still sorting through the wreckage, with no resolutions yet in sight.

Potential fraud

In the regulated forex broker universe, you can look through websites such as the NFA’s in the US or the FCA’s in the UK to find evidence of a broker’s registration and any potential complaints lodged against them. There’s an official record. If a broker’s past has raised a lot of red flags, you’ll see them boldly flapping in the breeze.

Offshore brokers operate in a world without any such official warnings. A broker that continually rips traders off can continue to do so without official regulatory inquiries. Bad reviews can be scrubbed or dismissed, and a sketchy broker can operate with relative impunity for a number of years.

The lack of easily accessible, official records and the sheer number of unregulated brokers also opens the door to fraudulent brokers who are simply trying to scam traders out of their deposits. It’s easy for a fake broker to appear legitimate because even legitimate offshore brokers leave very little official record.

Insufficient risk disclosure

Trading in the forex market can be a very risky endeavor. Markets move in unpredictable ways and even professional traders suffer through losing streaks. Regulatory bodies require brokers to disclose the risks. You may be tempted to ignore such disclosures, but they are important reading.

This is especially true when you’re dealing with other financial instruments that you might not be familiar with. Yes, forex CFDs move in response to their underlying currency pairs in the forex market, but do you know how they are correlated? Do you know how successful retail traders are when trading CFDs?

Regulated brokers in Europe that allow the trading of CFDs are required to prominently post just how risky CFDs are. If you’ve been to a regulated broker’s website, you’ll notice a banner on the top of every page that tells you exactly what percentage of their traders lose money on CFDs. (Spoiler alert: it’s a lot, usually between 65%–80%.) 

An unregulated broker will offer no such disclosures. 

No transparency 

Beyond a lack of disclosure about the risks involved, unregulated brokers are also pretty opaque when it comes to a lot of other things as well.

As required by law, regulated forex brokers provide very detailed statistics about their execution time, commission rates, spreads, and other key aspects of their business. You won’t find such statistics (at least not credible ones) when dealing with an unregulated broker.

You also know the names of principals and the directors of regulated brokers. You know where exactly they are incorporated. You know what regulatory agencies they answer to. You know how long they’ve been in business. You can find out if they’ve been subject to any sort of disciplinary measures. Bottom line: you know exactly who you are trading with. 

Contrast that with an unregulated forex broker. Whatever you know comes from the broker itself, and some of them are incredibly opaque. They provide very little meaningful background information, no information on who is actually running the show, and quote prices and statistics that are completely unsubstantiated. 

For some reason a lot of traders seem to inherently trust online trading platforms even if they have no idea who is behind them. Maybe I’m old fashioned, but if I’m going to give someone a big chunk of cash, I need to know exactly who that someone is.

No one to settle disputes

Regulatory bodies, like the National Future Association in the US, offer you the chance to resolve disputes between yourself and your brokerage firm. They also act as a higher power that can discourage fraudulent behavior. US forex brokers know that if they scam traders, there will be severe consequences.

An unregulated brokerage firm largely answers to its own conscience, to the extent that it has one. Maybe if you are one of the 307,815 people who live in Vanuatu, you would have some government support, but otherwise no government will intervene on your behalf. 

You would think that social media or review forums, such as TrustPilot, would offer you some recourse. Air your grievance in public and surely the broker will be forced to make things right, right? Take a look at the TrustPilot pages for some very popular unregulated brokers. There are a lot of grievances being aired without a whole lot of solutions. 

If things go wrong, you’ll be on your own little island of frustration, and that island won’t be nearly as beautiful as Vanuatu.

Should you use an unregulated forex broker?

I avoid unregulated forex brokers, and I think you should too. To me, the forex market is risky enough without adding additional broker-related risk. I bear no responsibility should you choose to go the unregulated route, but it’s ultimately up to you, of course, which is why I laid out the pros and cons of unregulated forex brokers above.

If you do decide to use an offshore broker, choose wisely and only select one of the very best offshore forex brokers. Read reviews of unregulated forex brokers, read personal experiences from other forex traders, do your due diligence, choose the most reputable broker you can find, and hope that your money is there when you decide to make a withdrawal.

Sources & Resources

National Futures Association – Forex Regulations Guide

CFTC – Forex Fraud Advisory

Vanuatu Financial Services Commission – Financial Dealers Licensing Act

UK Financial Conduct Authority – Register of Authorized Firms

Finance Feeds – Insolvency of Alpari UK

Leaprate – GCMFX Posts Bankruptcy Reasons

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