Offshore brokers refer to unregulated forex and CFD brokers that allow traders from other countries including the United States to open accounts outside the jurisdiction of US laws and financial regulations. They usually operate from offshore locations or countries typically referred to as tax havens.
Can US citizens use offshore forex brokers? Of course! US traders can register accounts and trade with offshore brokers. Though some of them may write that they do not accept traders from the USA and Canada because that is what most non-US regulated brokers write on their websites. But the truth is that they accept all clients irrespective of your country of origin or residence.
Is it legal to use offshore brokers in the USA?
The short answer is no, it is not encouraged for US citizens and residents to trade with offshore brokers. The US regulatory authorities describe it as unlawful for unregulated brokers to solicit or open accounts for US clients. So, the US regulators can only clamp down on offshore brokers if it is possible. But, most of these brokers exist only on the internet and are mostly anonymous.
However, since it is the offshore broker that went against the US regulatory laws by allowing a US resident or citizen to register; no action can be taken against a US trader who chooses an offshore broker. But, he is at the mercy of the broker since no guarantees or regulations are protecting his interests.
Learn More : Do offshore Brokers report to IRS ?
Why do US traders use offshore forex brokers?
Despite the risks involved in trading with offshore brokers, many US traders still stick to them. Below are some of the reasons why offshore brokers are popular:
Low trading capital: The trading capital required by offshore brokers to register a new live trading account is much smaller than that required by US brokers. With some offshore brokers, $10 is the minimum deposit.
High leverage: US brokers are restricted to maximum leverage of 1:50 for retail forex traders, but offshore brokers offer much more than that. It can go as high as 1:1000.
Low trading fees: Forex brokers usually charge commissions per lot or they mark up the spread thereby incorporating their trading fees. In all cases, offshore brokers charge lower commissions and offer lower spread charges than US brokers.
Unrestricted strategies: Unlike US brokers, offshore brokers allow all trading styles and strategies. For example, the CFTC banned hedging in the US but offshore brokers allow hedging, scalping, and any strategies used by traders.
CFD trading: Contract for differences (CFDs) are over-the-counter financial products that enable traders to speculate on the price movement of stocks, commodities, and other financial instruments without owning the assets. Trading of CFDs is banned in the US but offshore brokers offer CFD trading.
Learn More: Advantages and drawbacks of trading with an offshore forex broker?
Final Impression
Offshore brokers are unregulated so unauthorized to accept clients from the USA and other countries that have strict financial regulatory laws. They operate online and are mostly anonymous.
US traders are attracted to patronize offshore brokers because they do not impose the strict rules stipulated by the US regulators. Offshore brokers offer higher leverage, affordable trading costs, low trading capital, and allow CFD trading. They also permit hedging and other trading strategies.
So, trading with popular offshore brokers can be exciting and rewarding. However, there are no money-back guarantees and no supervisory authorities to ensure equity and fairness. In summary, as a US trader, you can choose to trade with offshore brokers but it is much riskier than trading with the US-regulated brokers.
