The Australian Securities and Investments Commission (ASIC) has filed a lawsuit against the crypto exchange eToro for offering high-risk contracts for difference (CFD) products, reportedly causing almost 20,000 clients to lose huge sums trading CFDs between October 5, 2021, and June 14, 2023.

ASIC’s Case Against eToro

In its official statement released on August 3, ASIC alleges that eToro breached the design and distribution obligations of its CFD product and that the crypto exchange was dishonest in its dealings. 

The Commission’s regulation requires that the target markets for CFDs must be narrow and clearly defined, as retail clients risk losing huge sums. Furthermore, it stipulates that CFD issuers like eToro must follow the design and distribution rules for CFD products and cannot adjust their target markets to fit their existing clients.

Part of the statement read:

ASIC considers that eToro’s conduct is likely to have resulted in a significant number of retail clients being exposed to the CFD product that was unlikely to be consistent with their investment objectives, financial situation and needs, resulting in a significant risk of consumer harm.

ASIC’s Deputy Chair Sarah Court also expressed her disappointment at eToro’s failure to comply with regulations. “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 said.

What CFD Trading Entails

CFDs are leveraged derivate contracts that allow traders to bet on the price movement of an underlying asset like cryptocurrencies, commodities, stock market indices, and foreign exchange rates, and eToro offers CFDs for all these assets. 

Due to the high risk of these leveraged derivative contracts, exchanges are usually expected to conduct screening tests and warn investors of the risks associated with these CFD products. 

According to the ASIC, eToro failed in this regard as it performed insufficient screening tests while offering these products to retail investors. 

The regulatory watchdog claims that the exchange’s current screening test also failed to exclude unsuitable clients from these CFDs. 

“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,” ASIC alleged. “For example, clients could amend their answers without limitation and clients were prompted if they selected answers which could result in them failing.”

This isn’t the first time the ASIC has taken action against trading firms offering high-risk CFD products to unsuitable customers. In 2020, AGM Markets, OT Markets, and Ozifin were fined a combined $75 million penalty by the Federal Court in a case brought by the regulator.