The Australian Securities and Investments Commission (ASIC) filed a lawsuit against the trading platform eToro, alleging that its contract for difference (CFD) product could harm investors. That type of monetary tool is a leveraged derivative contract that enables customers to speculate on the prices of equities, commodities, stock market indices, and digital assets.
The platform was among the first in its field to hop on the cryptocurrency bandwagon, allowing trading services with Bitcoin (BTC) in 2013 via CFDs. It later added support to Ethereum (ETH), Cardano (ADA), Bitcoin Cash (BCH), Litecoin (LTC), and others.
The Australian watchdog announced that it had commenced proceedings in the Federal Court against eToro, arguing its CFD product might not have been tested properly before being introduced to users:
“The case focuses on the appropriateness of eToro’s target market and the screening test used by eToro to assess whether a retail client fell within the target market for the CFD product.”
The ASIC went further, claiming that the financial product is highly dangerous and volatile, adding that the initial trial was “wholly inadequate to assess whether a retail client was likely to be within the target market.”
“ASIC considers that eToro’s conduct is likely to have resulted in a significant number of retail clients being exposed to the CFD product that was unlikely to be consistent with their investment objectives, financial situation, and needs, resulting in a significant risk of consumer harm,” the regulator assumed.
According to the ASIC’s estimations, approximately 20,000 eToro customers lost money between October 5, 2021, and June 14, 2023, due to trading CFDs.
“Our message to the industry is that CFD target markets should be narrowly defined given the significant risk that retail clients may lose all of their deposited funds. CFD issuers must comply with the design and distribution regime and cannot simply reverse engineer their target markets to fit existing client bases,” the agency’s Deputy Chair Sarah Court stated.
Contracts for differences (CFDs) let investors speculate on short-term market movements on different stocks and assets, including cryptocurrencies. They are illegal in some countries, including the United States of America and Hong Kong.
eToro’s Reaction to SEC’s Lawsuits
The firm had to make some amendments regarding its crypto policy shortly after the US SEC filed lawsuits against Binance and Coinbase, accusing the exchanges of providing trading services with a number of unregistered securities.
As a result, eToro banned US customers from purchasing ALGO, MANA, DASH, and MATIC (all of which were targeted by the Commission). However, the company asserted that it remains a supporter of the cryptocurrency industry, vowing to continue offering its clients “access to a diversified range of asset classes, which includes stocks, ETFs, and options.”