Australia’s financial regulator, the Australian Securities and Investments Commission (ASIC), has filed a lawsuit against eToro, a popular trading platform. The ASIC alleges that eToro’s contract for difference (CFD) product could potentially harm investors. CFDs are leveraged derivative contracts that allow customers to speculate on the prices of various assets, including equities, commodities, stock market indices, and digital assets.
eToro was one of the first platforms to embrace cryptocurrencies, offering trading services with Bitcoin (BTC) through CFDs since 2013. Over time, it expanded its support to include other cryptocurrencies like Ethereum (ETH), Cardano (ADA), Bitcoin Cash (BCH), and Litecoin (LTC).
The ASIC’s concerns revolve around the appropriateness of eToro’s target market and the screening test used to assess whether retail clients fell within that target market for the CFD product. The regulator claims that eToro’s conduct may have exposed a significant number of retail clients to the CFD product, which may not have been suitable for their investment objectives, financial situation, and needs. As a result, there was a significant risk of consumer harm.
According to the ASIC’s estimates, around 20,000 eToro customers lost money between October 5, 2021, and June 14, 2023, due to trading CFDs. The ASIC emphasizes that CFD target markets should be narrowly defined to mitigate the risk of retail clients losing all of their deposited funds. It also states that CFD issuers cannot reverse engineer their target markets to fit existing client bases but must comply with the design and distribution regime.
It’s important to note that CFDs, including those involving cryptocurrencies, allow investors to speculate on short-term market movements. However, they are illegal in some countries, such as the United States and Hong Kong.
eToro has faced regulatory challenges before. Following lawsuits filed by the US Securities and Exchange Commission (SEC) against Binance and Coinbase, eToro made amendments to its crypto policy. It banned US customers from purchasing certain cryptocurrencies targeted by the SEC, including ALGO, MANA, DASH, and MATIC. Despite these changes, eToro remains committed to offering its clients access to a diversified range of asset classes, including stocks, ETFs, and options.
The ASIC’s lawsuit against eToro highlights the need for proper scrutiny of financial products and the importance of protecting retail investors. As the case unfolds, it will shed light on the regulatory landscape surrounding CFDs and the responsibilities of trading platforms in ensuring the suitability of their products for investors.
