Australian regulator sues eToro over ‘high-risk’ leveraged derivative product

Australia’s financial regulator sued trading platform eToro on Wednesday over its “high-risk” leveraged derivative contract products that allow users to speculate on assets including cryptocurrencies.

In a statement released Thursday, the Australian Securities and Investments Commission accused eToro Aus Capital Ltd. of breaching the design and distribution obligations of its contract for difference (CFD) product.

The CFD product is a leveraged derivative contract that allows a client to speculate on changes in the value of an underlying asset, such as foreign exchange rates, stock market indices, single equities, commodities or crypto assets, according to ASIC.

Notably, ASIC alleged that between October 5, 2021, and June 14, 2023, nearly 20,000 of eToro’s users lost money trading CFDs. “EToro’s website states that 77% of retail investor accounts lose money when trading CFDs with eToro,” ASIC said.

The regulator is seeking declarations and pecuniary penalties from the court, according to the statement.

An eToro spokesperson told The Block that it is considering the allegations filed by ASIC and there is no impact or disruption of service for clients of eToro Aus.

Broad target market

ASIC said the product’s target market was “far too broad” and its screening test is “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, if a retail client had a medium-risk tolerance but was not an experienced investor and had no understanding of the risks of trading CFDs, that client still fell within the target market,” ASIC added.

In response to ASIC’s allegations, the eToro spokesperson said the proceedings relate to the time period from October 5, 2021, to July 29, 2023 and that “eToro AUS is now operating with a revised target market determination in place for CFDs.”

In June, eToro delisted four cryptocurrencies in the U.S. in the wake of the legal action taken by the U.S. Securities and Exchange Commission against crypto exchanges Coinbase and Binance.