The Australian Securities and Investments Commission (ASIC) has taken legal action against eToro, one of the leading trading platforms, over its Contract for Difference (CFD) product.
Despite the potential risks involved, ASIC claims that eToro’s target market for CFDs was too broad, encompassing individuals who lacked an understanding of the complexities and risks associated with CFD trading.
ASIC Criticizes eToro’s Broad CFD Target Market
The crux of ASIC’s legal action against eToro lies in the allegation that the company’s target market for CFDs was too broad.
The regulator contends that this wide-reaching approach resulted in inadequate screening, enabling customers with limited knowledge and understanding of CFD product risks to engage in trading.
These leveraged derivative contracts allow traders to speculate on the price movements of various underlying assets, including foreign exchange rates, stock market indices, equities, commodities, and cryptocurrencies.
The broad target market approach, according to ASIC, disregarded the risks associated with CFDs, especially when combined with highly volatile underlying assets, particularly crypto-assets.
The regulator further alleged that between October 5, 2021, and June 14, 2023, nearly 20,000 eToro clients experienced losses while trading CFDs.
However, ASIC’s deputy chair, Sarah Court, expressed disappointment in eToro’s lack of regulation compliance, emphasizing that CFD issuers should refrain from manipulating their target markets to accommodate existing client bases.
eToro’s Revised CFDs Target Market Determination
In response to the legal proceedings, an eToro spokesperson stated that the company had revised its CFDs target market determination.
The company clarified that the lawsuit pertained to a specific period, from October 5, 2021, to July 29, 2023.
eToro emphasized that the revised target market determination for CFDs guided its current operations.
Also, it reassured its clients that the legal proceedings would not impact its services and remained committed to addressing ASIC’s allegations responsibly.
The trading platform acknowledged the importance of adhering to regulations and vowed to cooperate with authorities to enhance investor protection and market integrity.
However, it remains to be seen how eToro will address the allegations and whether it will take further steps to mitigate potential risks associated with its CFD product.
eToro Halts MANA, MATIC, ALGO, and DASH Purchases for US Customers
Beyond its legal challenges in Australia, eToro faced another hurdle in the United States.
The retail trading platform decided to halt purchases of four cryptocurrencies, Algorand (ALGO), Polygon (MATIC), Decentraland (MANA), and Dash (DASH), for its US customers.
The move came after the United States Securities and Exchange Commission (SEC) classified these tokens as securities in recent lawsuits.
eToro’s decision to halt purchases of these cryptocurrencies mirrors a similar move made by competitor Robinhood.
Robinhood also suspended support for MATIC, Solana (SOL), and Decentraland (MANA), in response to their classification as securities by the SEC.
Despite delisting the mentioned cryptocurrencies, eToro emphasized its commitment to the crypto sector and its desire to offer users access to diverse asset classes, including ETFs, stocks, and options.
The company stated its willingness to collaborate with regulators worldwide to help shape the future of the crypto industry and ensure access for ordinary investors.
Changing Regulations: Safeguarding Investors
The legal action against eToro by the Australian financial regulator highlights the significance of proper screening and compliance in offering high-risk financial products.
eToro’s decision to halt purchases of certain cryptocurrencies for US customers also underscores the evolving regulatory landscape surrounding the crypto industry.
As legal and regulatory environments evolve, companies like eToro must adapt their practices to safeguard investors and responsibly navigate the changing regulatory landscape.