🔍 RBI’s New Target: Forex Apps
The RBI is leaving no stone unturned to protect retail investors. Here is its current step to protect us from illegal forex apps.
Traffic jams, mosquitoes and ads.
These are things that probably no one likes but we just can’t escape them.
Especially ads. Now, even with an ad-free subscription of Disney+ Hotstar you have to suffer through ads.
But what most people don’t understand is that most ads are super misleading.
No, there aren’t any hot singles in your area, and no, that sketchy looking app won’t make you a millionaire.
Now, while the RBI can’t do anything about the first kind of ad, it is trying to stop the second kind. Because it is seriously injurious to your financial health.
❎ Forbidden Forex Apps
Tired of just giving warnings and advice, RBI has now straight up launched a list of 34 apps and platforms that are not authorised by it to conduct forex trading or operate as an electronic trading platform*.
And you’ll probably be shocked to learn that Octa FX, which is promoted by a lot of celebrities including the IPL team Delhi Capitals, is on the list.
But why is the RBI warning against these apps?
First, only registered authorities with the RBI can engage in forex trading. Since these platforms aren’t registered and are not even electronic trading platforms, they have no business being in this business (Here’s a list of forex platforms registered under the RBI).
Why aren’t these platforms registered? And why isn’t the RBI giving them licenses?
Because these platforms engage in illegal activities like binary trades and contract for difference trading.
🧠 Understanding Contract for Difference (CFD) Trading
When you trade stocks, you’re directly buying and selling (and sometimes even lending and borrowing) a real asset.
Even when you’re trading in futures and options, there is an agreement to buy an asset at a later date.
But in a CFD you are neither buying a stock/commodity upfront, nor promising to buy it later. It is simply a bet. Huh?
Let us explain with an example.
Garima thinks RIL’s stocks will rise. So, she makes a contract with a platform X saying that if the stock rises from its current price (let’s say Rs. 100) then platform X will pay the difference between the current price and the future price. But if the stock’s price goes down, then Garima will pay the difference between the current price and the future price.
Situation 1: Stock’s price rises to Rs. 150 and platform X pays Garima Rs. 50.
Situation 2: Stock’s price falls to Rs. 70 and Garima has to give platform X Rs. 30.
To execute this contract Garima gives Rs. 100 to the platform to buy RIL shares at the current price (Rs. 100). So, the platform can pay off Garima from their gains if the stock goes up (after keeping a small amount as trading charge) or make up for losses from the money Garima will have to pay.
Now, the problem here is that this practice is illegal in India as it is too risky.
👀 The Risks Involved
You see, unlike futures and options there is no expiry date to CFD contracts. A trader can decide to close the contract whenever they want, either when they have made enough profits or don't want to take on more losses. But this no expiry approach exposes users to massive risk. The platform could choose to shut down anyday, or go bankrupt and the customers would lose their money (since the platform bought the stock in its own name).
What’s more, a lot of these platforms don’t even buy the underlying stocks/commodities that customers are betting on. Rather, they are operating like a casino.
What they do is take bets from customers. If the customer wins, the platform pays them with its own money. And if the customer loses, they pay directly to the platform.
No money is 'wasted' in buying or selling the underlying asset (stocks/commodities).
So, the platform gets more money per trade instead of just a tiny spread.
This is often called a binary trade as there is no third party involved. Just the platform and the customer.
But this is riskier as it is kind of an “all-in” situation. Say, for instance, you bet that RIL stock will rise: if it does rise you get the payout you decide. If it doesn’t you lose your entire money.
Here the risk for the customer increases. You see, earlier the platform was just a facilitator in the trade. But in this scenario it is actively betting against users which complicates things.
Platforms now want users to trade more and more so they can win.
So, they begin offering leverage. What that means is if a trade is going to cost Rs. 1,000, the platform allows users to pay only Rs. 100 upfront and the rest later.
This encourages more and more users to start trading, increasing profits for the platform.
What’s more, these platforms often let traders win early or entice them with free cash in their trading accounts, so that they can get hooked.
No wonder the RBI wants to shut them down. Plus, a lot of times these platforms are betting on foreign currencies or stocks. And in India it is illegal to send remittances (money abroad) for such kind of speculative trading.
🤔 Why do People Still Use These Platforms?
Because they usually don’t know that these platforms are illegal (since they advertise so openly).
And in India forex trading is limited in scope. But these apps bypass current rules allowing people greater access.
But this access can often turn dangerous.
However, the current RBI notice also just warns users.
It gives users some clarity, but doesn’t do more. The RBI can take further action against them. But until it does these apps can still continue running and trap users who haven’t read the notice. So, share this with your friends and tell them to stay away from these apps.
🤓 Noob’s Corner: *Electronic Trading platform: An electronic trading platform is any digital platform other than a recognised stock exchange on which transactions of stocks and other instruments can take place. Such platforms are authorised by RBI. Example: Upstox.
⚡In a line: The RBI is trying to warn customers against forex trading apps because of their questionable practices.
💡Quick question: Should the RBI move the government to completely ban these apps? Have you had an experience with any such app?
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