eToro, a multi-asset trading platform, recently reached a settlement with the U.S. Securities and Exchange Commission (SEC) over allegations that it operated as an unregistered broker and clearing agency by offering cryptocurrencies deemed securities to U.S. customers. The company agreed to pay $1.5 million in fines while not admitting to the charges. As part of the settlement, eToro must cease trading certain digital assets and transfer or liquidate affected holdings. The SEC's actions are part of its broader regulatory push against cryptocurrency platforms, often criticized for its “regulation by enforcement” approach.

eToro Reaches $1.5 Million Settlement with SEC

Background of the Case
eToro agreed to settle charges brought by the U.S. Securities and Exchange Commission (SEC), agreeing to pay a $1.5 million penalty. These charges stem from allegations that eToro operated as an unregistered broker and clearing agency. The SEC accused the platform of offering and selling cryptocurrencies classified as securities to U.S. customers since at least 2020.

Regulatory Pressure on Crypto Platforms
This case echoes previous charges filed by the SEC against other cryptocurrency-related exchanges. The regulatory body has intensified its scrutiny on the industry, citing compliance failures and unregistered activities. Chairman Gary Gensler’s administration has reportedly collected over $4.6 billion in fines from the crypto sector, signaling a sharp regulatory shift.

The SEC's Allegations Against eToro

Unregistered Broker and Clearing Agency
The SEC’s main accusation was that eToro was operating without proper registration as both a broker and clearing agency. This activity allegedly involved the sale of cryptocurrencies deemed securities, in violation of federal securities laws.

Similar Charges in the Crypto Space
The SEC’s case against eToro follows a similar pattern of enforcement it has applied to other crypto businesses. High-profile penalties and even imprisonments, such as that of Binance CEO Changpeng Zhao, highlight the broad scope of the SEC’s enforcement strategy.

Settlement and eToro’s Compliance

eToro's Response to the Settlement
While eToro did not admit guilt, it agreed to comply with the SEC's settlement, paying the $1.5 million fine. Additionally, the platform must halt the offering of digital assets considered securities and take specific measures regarding customer holdings.

Liquidation and Asset Transfer Mandates
eToro is required to either transfer crypto assets affected by the settlement back to its users or liquidate their positions. Any liquidation proceeds will be returned to investors. eToro has 187 days to fully comply with the order from the SEC.

Platform Adjustments and Investor Notices

eToro's 180-Day Window for Traders
To accommodate the SEC’s mandates, eToro issued a notice to its users, providing them with a 180-day period to manually close trades involving the affected digital assets. If customers do not act within this timeframe, the system will automatically liquidate their holdings before the SEC-imposed deadline.

Exemptions for Bitcoin, Bitcoin Cash, and Ethereum
Despite the broader restrictions, the SEC allowed eToro to continue facilitating trades in Bitcoin (BTC), Bitcoin Cash (BCH), and Ethereum (ETH) until further notice. This reflects the SEC’s recognition of certain digital assets, particularly these three, as not being securities.

Statements from the SEC

Comments on Investor Protection
Gurbir Grewal, Director of the SEC’s Division of Enforcement, praised eToro’s compliance, stating, “By removing tokens offered as investment contracts from its platform, eToro has chosen to come into compliance and operate within our established regulatory framework.” He emphasized that this resolution improves investor protection and provides a compliance pathway for other crypto intermediaries.

Penalty as a Deterrent
Grewal also highlighted the significance of the $1.5 million penalty, underscoring that it reflects eToro's agreement to stop violating federal securities laws while maintaining its U.S. operations. This settlement serves as both a deterrent and an example for other firms in the crypto industry.

Some of the text from SEC official release follows.....

eToro publicly announced that, going forward and subject to the provisions of the SEC’s order in this matter, the only crypto assets that U.S. customers can trade on the company’s platform will be Bitcoin, Bitcoin Cash, and Ether. eToro publicly announced that it will provide its customers with functionality to sell all other crypto assets for only 180 days after the issuance of the SEC’s order.

“By removing tokens offered as investment contracts from its platform, eToro has chosen to come into compliance and operate within our established regulatory framework. This resolution not only enhances investor protection, but also offers a pathway for other crypto intermediaries,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “The $1.5 million penalty reflects eToro’s agreement to cease violating applicable federal securities laws as it continues its U.S. operations.”

Without admitting or denying the SEC’s findings, eToro agreed to the entry of a cease-and-desist order, to pay a penalty of $1.5 million, and, within 187 days of the order, to liquidate any crypto assets being offered and sold as securities that eToro is unable to transfer to its customers, and return the proceeds to the respective customers.