According to Investopedia, a contract for differences (CFD) is a contract between a buyer and a seller that stipulates that the buyer must pay the seller the difference between the current value of an asset and its value at contract time. CFDs allow traders and investors an opportunity to profit from price movement without owning the underlying assets. The value of a CFD does not consider the asset’s underlying value, only the price change between the trade entry and exit.

How is this relevant for Elphinstone? In theory, we could accept deposits from clients in Pakistani rupees in a bank account in Pakistan, and separately buy stocks, bonds, or ETFs in the United States using US dollars, locking in the exchange rate and the price at which such investments were purchased, and then allowing clients to withdraw money back in Pakistan rupees using only the difference in the price of both the investment and the exchange rate.

This would allow us to serve clients who only have Pakistani rupees and no US dollar assets. It would potentially be allowed under US regulations, though the stance of Pakistani regulators on this is unclear, but unlikely to be favourable.

Even if we assume that Pakistani regulators would allow such transactions, we would not want to undertake such transactions for one very simple reason: any CFD clients would not directly own their investments, and not be the clients of a FINRA-regulated broker-dealer, and therefore have no protections to their investment account in the form of SIPC insurance.

If we or our broker partner ever went out of business, there would be no recourse and no protection for our client’s money. That is precisely the kind of financial third-class citizenship that we believe Pakistanis do not deserve. We want to offer our clients services with the fullest protection of US law. That rules out CFDs as a product we would ever offer.

Here is an article on Investopedia, outlining further details about CFDs. (Link)

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