Commodities Futures Trading Comm. Hits Polymarket with $1.4M Penalty Over Swaps

Posted on: January 3, 2022, 07:59h. 

Last updated on: January 4, 2022, 09:37h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Polymarket, an internet-based marketplace that allows users to bet on events ranging from cryptocurrency prices to economic data to coronavirus case counts, was slapped with a $1.4 million fine by the Commodities Futures Trading Commission (CFTC). The fine stems from allegations the platform offered illegal contracts.

Polymarket CFTC
CFTC headquarters in Washington, DC. The regulator hit Polymarket with a $1.4 million fine. (Image: Wall Street Journal)

The CFTC says New York-based Polymarket, which has been accepting wagers since June 2020, has been operating as an unregistered platform.

All derivatives markets must operate within the bounds of the law regardless of the technology used, and particularly including those in the so-called decentralized finance or ‘DeFi’ space,” Vincent McGonagle, the CFTC’s acting director of enforcement, said in the statement.

The penalty applies to three betting markets that Polymarket will terminate and refund customers’ money. The CFTC said Polymarket received a “reduce” penalty because it cooperated with the commission’s investigation.

Changes Coming for Polymarket

As PredictIt proves, bettors love wagering on politics, particularly US electoral outcomes. PredictIt carved out a niche for itself because traditional domestic sportsbooks are prohibited from offering bets on elections.

Polymarket, operated by Blockratize Inc., tapped into that theme. As volumes soared in advance of the 2020 presidential election, the company boosted fees. Earlier this year, its turnover topped $100 million, underscoring the point that some bettors like outcome-based markets.

However, there’s a marquee difference between Polymarket and PredictIt. The latter, which is based in New Zealand and has an office in Washington, DC, is able to offer markets on US election outcomes (and other events) to participants in this country. That’s because it’s regulated by the CFTC, and to secure that regulation and market access, questions on PredicIt are limited to 5,000 participants on either side, and no investor can risk more than $850 per answer.

Conversely, Polymarket isn’t as heavily regulated as PreditIt, at least not yet, and its ties to the blockchain may be cause for concern for regulators that are struggling to grasp blockchain and cryptocurrency. In the wake of the CFTC fine, Polymarket is promising changes to its business model, though it didn’t go into detail regarding potential alterations.

“An announcement on the future of Polymarket will be released in the coming days,” according to a statement issued by the company. “We are thrilled to put this settlement behind us, and are prepared and excited for the next chapter.”

Polymarket Offerings

It’s easy to see why Polymarket resonates with some bettors. Not all bettors want to invest in sports. But the Polymarket offers a sports wagering-like feel on a host of prominent topics and events, ranging from President Biden’s approval rating to inflation percentages to non-fungible token (NFT) prices, and much more.

“According to the order, such event market contracts, each of which is composed of a pair of binary options, constitute swaps under the CFTC’s jurisdiction, and therefore can only be offered on a registered exchange in accordance with the CEA and CFTC regulations,” adds the CFTC.

The CFTC has previously warned investors to avoid off-market binary options trading and unregulated trading platforms offering these contracts.