eToro Sued by Australia

Australia’s Securities and Investments Commission (ASIC) has made public its allegations against social investing platform eToro’s Australian entity (eToro Aus Capital Limited). The market regulator has taken legal action against the company for purported breaches of their “design and distribution obligations and of eToro’s licence obligations to act efficiently, honestly and fairly.” The principal concern centres around eToro’s contract for difference (CFD) product, a derivative contract that permits clients to speculate on changes in the value of underlying assets, including cryptocurrencies.


Broadening the Scope: ASIC’s Allegations Against eToro

In a move reflective of Australia’s broader crackdown on crypto firms, ASIC asserts that eToro’s target market was inordinately wide and its screening test was highly unlikely to filter out unsuitable traders. In the two-year period between October 2021 and June 2023, almost 20,000 of eToro’s clients reportedly incurred losses trading CFDs.

The target market, as characterized by ASIC, was excessively lenient. A retail client with medium-risk tolerance and lacking experience in investment, with no comprehension of the risks entailed in trading CFDs, could still find themselves within the targeted demographic. “eToro’s screening test was very difficult to fail and of no real use in excluding customers for whom the CFD product was not likely to be appropriate,” ASIC stated.

Furthermore, eToro’s system allegedly allowed for an unrestricted revision of answers and proactively prompted clients if their responses risked disqualification. This implies that the system was lenient to the point of undermining the purpose of the screening test.

eToro’s Response to ASIC’s Allegations

eToro AUS has expressed its intention to consider the allegations made by ASIC and respond accordingly. The company asserts that there will be no disruption of service for clients of eToro AUS, nor any substantial impact on eToro’s global business. In response to ASIC’s accusations, the company revealed it is now operating with a modified target market determination in place for CFDs.


Cryptocurrency and CFDs: High Risk and Volatility

CFDs, as leveraged derivatives, allow investors to speculate on the price movements of an array of underlying assets including foreign exchange rates, stock market indices, individual equities, commodities, and cryptocurrencies. In this case, ASIC has pinpointed eToro’s CFDs as “high-risk and volatile.”

The risks associated with the CFD products are perceived to be magnified when the underlying assets themselves embody their own risks, as is the case with “extremely high-risk and volatile products such as crypto-assets.”


In the Greater Context: Australia’s Crypto Regulation

This recent litigation against eToro is part of a larger narrative in which Australian regulators, including ASIC, are intensifying their scrutiny over the cryptocurrency sector. The country has recently taken measures against other cryptocurrency companies, including Binance Australia, with offices searched by ASIC. Additionally, Australia’s major banks have instituted partial restrictions on crypto transactions due to concerns related to scams and the increasing amount of money lost by customers.


Awaiting Court Proceedings

ASIC’s pursuit of monetary penalties from eToro is still ongoing, with the court yet to set a date for proceedings. Australia’s financial regulator’s allegations against eToro over its CFD product represent increasing regulatory concerns about the screening and distribution of such high-risk, leveraged derivative contracts to retail investors.

In this emerging environment, the need for clear, fair, and efficient market practices is paramount. It remains to be seen how eToro, and the broader industry, respond to these recent challenges. As regulators worldwide grapple with the rapidly evolving cryptocurrency market, these proceedings could serve as a critical precedent for future regulatory actions.