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(Kitco News) - Cryptocurrency exchanges continue to face new enforcement actions from regulators as the Australian Securities and Investment Commission (ASIC) has filed a lawsuit against eToro, a social trading and multi-asset investment company, accusing the platform of allegedly violating the design and distribution requirements related to its contract for difference (CFD) offering.
A CFD is a leveraged derivative contract that allows a client to speculate on the change in value of an underlying asset, such as foreign exchange rates, stock market indices, single equities, commodities, or cryptocurrencies.
The crypto CFDs offered by eToro allow for up to two times leverage on certain assets. Others cover stocks, currencies, commodities, and precious metals.
“ASIC is alleging breaches of design and distribution obligations and of eToro’s license obligations to act efficiently, honestly, and fairly,” a press release from ASIC said. “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 design and distribution obligations (DDO) laid out in Australia’s financial regulations require firms to design financial products that meet the needs of consumers, and to distribute those products in a targeted manner.
The regulator said that the target market for eToro’s CFD product “was far too broad for such a high-risk and volatile trading product where most clients lose money, and that the screening test was wholly inadequate to assess whether a retail client was likely to be within the target market.”
This is likely to have led to a significant number of retail clients being exposed to a product “that was unlikely to be consistent with their investment objectives, financial situation, and needs, resulting in a significant risk of consumer harm,” ASIC said.
“A target market determination is an important requirement under DDO,” the regulator added. “It is a mandatory public document that sets out the class of consumers a financial product is likely to be appropriate for (target market) and matters relevant to the product’s distribution and review.”?
ASIC alleged that between Oct. 5, 2021, and June 14, 2023, almost 20,000 of eToro’s clients lost money trading CFDs, and noted that the company is aware of the risks, as its website states that 77% of retail investor accounts lose money when trading CFDs with eToro.
According to the lawsuit, eToro’s screening did not exclude a high proportion of retail clients, with only 8% of those screened from Oct. 5, 2021 - Jan. 25, 2022 being excluded from the product. From Jan. 26, 2022, onwards, only 6% were excluded.
“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,” said Sarah Court, Deputy Chair of ASIC. “CFD issuers must comply with the design and distribution regime and cannot simply reverse engineer their target markets to fit existing client bases.”
“ASIC is disappointed by the alleged lack of compliance in this case, given eToro’s market penetration and the depth of its brand awareness, both in Australia and globally,” she added.
The regulator said that eToro failed to do all things necessary to ensure that the financial services covered by its license were provided efficiently, honestly and fairly by applying the screening test to determine whether to issue the CFD product to retail clients.
“ASIC is concerned eToro’s screening test inappropriately exposed clients to the CFD product,” she added. “Providers need to ensure clients are receiving products that are consistent with their needs and the design and distribution obligations are being met.”
The date for the first case management hearing has not yet been scheduled by the court.
According to an eToro spokesperson, the company’s Australian subsidiary will respond to ASIC after considering the allegations filed.
“There is no impact or disruption of service for clients of eToro AUS and no material impact on eToro’s global business,” the spokesperson said. “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.”
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This lawsuit by ASIC comes as eToro’s stature in the cryptocurrency market is rising, thanks in part to multiple enforcement actions being filed against its biggest competitors, including Coinbase and Binance.
In April, the trading platform formed a partnership with Twitter, since rebranded to X.com, that allows X users to purchase cryptocurrencies and stocks directly through the social media platform.
Users can view market charts on a variety of different financial instruments directly from X, and can buy and sell those assets by clicking the “View on eToro button,” which redirects them to the eToro platform where they can complete their transaction.
