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The Australian Securities and Investments Commission (ASIC) has initiated legal action against the trading platform eToro, claiming that its contract for difference (CFD) product poses risks to investors. This financial instrument is a leveraged derivative contract that allows users to speculate on the price movements of stocks, commodities, market indices, and digital currencies.
eToro was one of the pioneers in the cryptocurrency sector, offering trading services for Bitcoin (BTC) through CFDs in 2013. Subsequently, it expanded its offerings to include Ethereum (ETH), Cardano (ADA), Bitcoin Cash (BCH), Litecoin (LTC), and other cryptocurrencies.
ASIC’s Concerns
The Australian regulatory body announced that it has initiated proceedings in the Federal Court against eToro, contending that its CFD product may not have undergone adequate testing prior to its launch for consumers:
“The case centers on the suitability of eToro’s target market and the evaluation process employed by eToro to determine whether a retail client was included in the target market for the CFD product.”
ASIC further asserted that the financial product is extremely risky and volatile, stating that the initial assessment was “entirely insufficient to determine whether a retail client was likely to fall within the target market.”
“ASIC believes that eToro’s actions likely led to a considerable number of retail clients being exposed to the CFD product that was probably inconsistent with their investment goals, financial circumstances, and requirements, resulting in a substantial risk of consumer harm,” the regulator stated.
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According to ASIC’s estimates, around 20,000 eToro clients incurred losses between October 5, 2021, and June 14, 2023, as a result of trading CFDs.
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“Our message to the industry is that CFD target markets should be narrowly defined due to the significant risk that retail clients may lose all of their invested funds. CFD issuers must adhere to the design and distribution framework and cannot merely adjust their target markets to accommodate existing client bases,” remarked the agency’s Deputy Chair Sarah Court.
Contracts for differences (CFDs) enable investors to speculate on short-term market fluctuations across various stocks and assets, including cryptocurrencies. They are prohibited in certain jurisdictions, such as the United States and Hong Kong.
eToro’s Reaction to SEC’s Lawsuits
The company was compelled to revise its cryptocurrency policy shortly after the US SEC filed lawsuits against Binance and Coinbase, alleging that the exchanges were offering trading services involving several unregistered securities.
Consequently, eToro restricted US customers from acquiring ALGO, MANA, DASH, and MATIC (all of which were under scrutiny by the Commission). Nevertheless, the firm maintained that it continues to support the cryptocurrency sector, pledging to provide its clients with “access to a diverse array of asset classes, including stocks, ETFs, and options.”
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