After regulatory troubles in the US, eToro is now targeted by Australian regulators.
Crypto exchange eToro has come under scrutiny from Australia's financial regulator, the Australian Securities and Investments Commission (ASIC), leading to legal proceedings over concerns with the company's contract for difference (CFD) product.
The allegations center around what ASIC views as inadequate screening processes and inappropriate target markets for these highly speculative investments.
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Leveraged derivative contracts, known as CFDs, allow investors to bet on price movements of various underlying assets. These include foreign exchange rates, single equities, stock market indices, commodities, and cryptocurrencies. eToro provides CFD products for all of these categories.
However, ASIC has raised concerns over the handling and marketing of high-risk instruments, particularly concerning their "volatile" nature and the platform’s screening process for potential customers.
eToro’s screening test was very difficult to fail and of no real use in excluding customers for who the CFD product was not likely to be appropriate. For example, clients could amend their answers without limitation and clients were prompted if they selected answers which could result in them failing.
ASIC's legal documents further highlighted that the risks associated with CFD products become more complex and precarious when the underlying assets are “extremely high-risk and volatile products such as crypto-assets.” This is a crucial concern given that eToro’s crypto CFDs can offer up to two times leverage on certain assets, in addition to covering stocks, currencies, and precious metals.
The regulator has argued that eToro's target market was ill-defined, allowing individuals who didn't understand the inherent risks of CFD trading to become involved. According to ASIC, between October 2021 and June 2023, nearly 20,000 of eToro’s clients sustained losses through trading CFDs.
An eToro spokesperson addressed the legal action, stating:
These proceedings relate to the time period 5 October 2021 to 29 July 2023. eToro AUS is now operating with a revised target market determination in place for CFDs.
The spokesperson also emphasized that the ongoing matter has not disrupted the firm's services and that the company will consider ASIC's allegations carefully before responding.
The situation with eToro in Australia follows a related incident in the United States, where eToro halted trading in four cryptocurrencies due to their categorization as securities in lawsuits by the Securities and Exchange Commission.
The case against eToro by ASIC highlights the ongoing concerns and scrutiny faced by trading platforms offering complex and risky investment products. The development reiterates the importance of robust regulatory compliance, particularly in the ever-evolving landscape of financial products tied to cryptocurrencies. The outcome of these proceedings may have far-reaching implications for platforms offering similar investment opportunities in Australia.
