The forex market is an online marketplace where buyers and sellers exchange currencies at agreed rates. It is an over-the-counter market that trades online; without any physical location. Similarly, forex brokers offer their services wholly online.
In an attempt to curb cybercrime, collect taxes, protect traders, and strengthen genuine brokers, the financial authorities in many nations are licensing and regulating the activities of forex brokers within their jurisdictions. Unfortunately, this has resulted in harsh restrictions that have adversely affected some ambitious forex traders, hence the desire to trade with offshore brokers.
Meaning of an offshore forex broker?
An offshore forex broker is a financial company that offers online forex and CFD trading to foreign nationals without authorizations or licenses. They are generally unregulated and allow traders from other countries to open trading accounts with them; even though it may be illegal.
But, offshore brokers operate over the internet and are mainly from offshore countries, so it is very difficult to find them or force them to face the law. Even when CFTC launched a clamp down on them, many of them pasted it conspicuously on their websites that they do not accept US clients. But they do; the message was to satisfy the requirements of US regulators, thereby shutting off every focus on them.
Below are the advantages and disadvantages of trading with offshore brokers:
Pros
- The trading fees are very small when compared to that of regulated brokers.
- Requires less trading capital.
- Offers forex and CFDs while US brokers are banned from trading CFDs.
- Trading with higher leverages.
- You can maintain privacy and even evade taxes.
Cons
- Your deposits are not protected.
- No higher authority to settle disputes between broker and trader.
- Several internet fraudsters mask as offshore brokers.
- No transparency in operations.
How Offshore Brokers Work?
Generally, the forex market is unregulated, so anyone can just start an online brokerage without registration or documentation. But, to appear credible and attract more forex traders, there is every need for some form of documentation, licenses, and security implementations to assure the investor that his money is safe with the broker.
This is why offshore brokers register with countries referred to as ‘tax havens’ where there are lenient or no regulations on forex trading and minimal taxation. Below are some of their methods of operations:
Registration: Account registration is done online by completing an account opening form. Most times, account verification is required. Just upload your government-issued ID card and a utility bill and your account will be approved.
Fund Deposits: Most of them accept Bitcoin (BTC) deposits. Cryptos like BTC support anonymous transactions, so it is safer for everyone. If you have no BTC, they mostly partner with “Instacoins” to help you with BTC purchases and deposits. Recently, some of offshore brokers are becoming PayRedeem merchants. This helps them to accept eCards issued by PayRedeem which are safe and anonymous.
Withdrawals: BTC is the most popular withdrawal option. Some of them can also do wire transfers.
Platforms: The platform of choice is the MT4 trading platform. It is free, powerful, and generally accepted by most forex traders from all over the world. Additionally, the platform works on multiple devices including web browsers, windows, macOS, Android, and iOS.
Support: Most of them provide support via email or web chats. Phone numbers may expose some details about them, so most of them do not offer phone support.
Trading tools and education: Most offshore brokers do not have the time or manpower to create a trading academy, organize regular webinars, or present daily market news and analyses. Most of them provide no trading tools or market support to their clients.
Learn More: Do offshore Forex Brokers Report to IRS ?
Why Offshore Forex Brokers?
Below are some of the reasons why many traders choose offshore brokers instead of regulated brokers:
- While US brokers are restricted to a maximum leverage of 1:50 for retail forex traders, offshore brokers offer much more leverage. It can be up to 1:1000.
- The trading capital can be as low as $10.
- Trading commissions can be as low as $2 per round lot while spreads can be very tight.
- You can trade US stocks CFDs without owning the equity shares. CFD trading is not available with US-regulated brokers.
- Many bonuses are available with offshore brokers.
Popular Jurisdictions of Offshore Forex Brokers
A large percentage of the offshore brokers are registered in the Island nations or offshore countries popularly referred to as ‘tax havens’. This is because, in these countries, foreign companies can easily register and operate with little or no documentation, residency permits, and tax obligations. This is opposite to what is obtainable in the United States and other European countries where international businesses are subjected to taxes, licenses, and registrations.
Below are the popular jurisdictions of offshore forex brokers:
St. Vincent and the Grenadines (SVG)
This is an Island country in the Caribbean and perhaps, the most popular location for offshore forex and CFD brokers. The country is a well-known tax haven as taxes are low and doing business is relatively easy. The Financial Services Authority of the SVG (FSA SVG) does not license, regulate or supervise forex brokers that are registered in the country.
This is good news for offshore brokers and online scammers. Anyone can easily register a brokerage firm and start accepting online clients from anywhere with impunity.
Belize
Belize is a Caribbean country located in Central America; it shares its northern border with Mexico. Forex brokers in Belize are required to obtain a license issued by the International Financial Services Commission (IFSC Belize). The demands and costs are much lower when compared to a US broker license. Also, there are no leverage and CFD restrictions.
Republic of Vanuatu
This country is made up of a group of Islands in the South Pacific Ocean, off the Australian coast. Vanuatu Financial Services Commission (VFSC) is the authority that licenses forex brokers to operate in the country and beyond. Over the years, Vanuatu has been a tax haven for brokers in Australia and New Zealand.
Vanuatu is fast becoming a great location of choice for offshore brokers because of the following reasons:
- VFSC has faster processing times when compared to other regulators.
- Affordable initial license cost and maintenance
- No leverage restrictions
The British Virgin Islands (BVI)
This British overseas Territory is made up of over 50 Islands and is located in the Caribbean. The BVI Financial Services Commission (BVI FSC) is in charge of broker licenses, insurance, bank licenses, and all financial activities in the territory.
BVI FSC license is a top choice because of the easy requirements. For example, you do not need a local office and staff, no taxes, and no physical meetings to obtain a broker license.
Final Verdict
Offshore forex brokers are unauthorized brokers that allow foreign clients to register and trade with them. They offer great services demanded by traders from all over the world including the USA. The strict regulations in the US protect traders but it is also making things more expensive and difficult for traders with small capital and huge risk appetite.
A typical offshore forex broker will enable clients to register on its website, verify the account, make crypto deposits, and trade with the MT4 trading platform. They do not bother with trading resources such as daily market analysis, webinars, trading education, etc.
Most offshore brokers look for a tax haven, register companies there, and commence online operations. The popular jurisdictions of these brokers are SVG, BVI, Belize, and the Republic of Vanuatu.
There are some advantages and disadvantages of trading with offshore forex brokers. No matter the choice you make, be sure that you understand the risks that come with forex trading especially if you choose to trade with an offshore broker.
