Australian Regulator ASIC Sues eToro for Offering High-Risk Derivative Products

Crypto trading platform eToro finds itself in major trouble as the Australian Securities and Investments Commission (ASIC) has filed a lawsuit against them for offering high-risk leverage derivative products that allow users to speculate on cryptocurrencies.

In an official statement on Thursday, August 3, ASIC accused eToro Aus Capital Ltd. of breaching the distribution and design obligations of its contract for difference (CFD) product. Crypto trading platform eToro offers a variety of CFDs, which are leveraged derivatives contracts.

With CFDs, buyers can make speculative bets on the price movements of different assets, including foreign exchange rates, stock market indices, single equities, commodities, and cryptocurrencies.

ASIC said that the crypto trading platform performed insufficient screening tests while offering leveraged derivative contracts to retail investors. ASIC stated that the CFDs offered by eToro were “high risk and volatile”. The regulator also stated that the platform’s existing screening test failed to exclude unsuitable customers from its trading product. Furthermore, ASIC said:

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 Seeking Penalties for eToro

The regulator has also alleged that the target market for eToro’s products was “far too broad” with some users having little understanding of CFD trading risks. “ASIC alleges that between 5 October 2021 and 14 June 2023, almost 20,000 of eToro’s clients lost money trading CFDs,” it added.

ASIC Deputy Chair Sarah Court expressed disappointment with eToro’s alleged lack of compliance. She emphasized that the target markets for CFDs should be specific and carefully defined because retail clients face significant risks of losing all their money.

CFD issuers must follow the design and distribution rules and cannot adjust their target markets to fit their existing clients. eToro’s wide market reach and global brand awareness made ASIC’s concerns more significant.