Some not-for-profit prediction markets have been allowed to operated without CFTC action but commercial operators haven't had much success

Federal Commission Orders Crypto Prop Betting Site Polymarket To Cease Operations

Recently, the Commodities and Futures Trading Commission (“CFTC”) fined crypto-currency prediction site Polymarket $1.4 million and ordered that the site be shut down.

According to the CFTC’s case background, the order to shut down follows Polymarket “operating an illegal unregistered or non-designated facility for event-based binary options online trading contracts, known as ‘event markets.’”

What is Polymarket?

The Polymarket site is still up, though it appears to simply be letting contracts reach settlement. It describes itself as “a decentralized information markets platform, harnessing the power of free markets to demystify the real-world events that matter most to you.”

Put more simply, Polymarket is a peer-to-peer betting site where users can wager on a variety of propositions. These include such questions as “Will Joe Biden be President of the USA on January 6, 2022,” or “Will Chris Cuomo launch a Substack before January 10, 2022?”

The site offered a variety of such yes-or-no propositions, mostly centered on politics and cryptocurrency prices. However, there were a few sports propositions among the options as well.

How does Polymarket work?

The majority of the propositions offered users the ability to select yes or no with the combined pricing of the two options equaling one dollar, much like the prediction market PredictIt. That is, if Yes shares for a proposition are going for $0.60, then the corresponding No shares will sell for $0.40, which implies a consensus prediction that there is a 60% chance the proposition comes true. When the site settles the proposition, those holding the correct shares receive a payout of $1 per share, while the incorrect shares become worthless.

According to Polymarket’s FAQ, the site is built on the blockchain and users make selections of yes or no using a stablecoin called USD Coin. What this means is that it is a cryptocurrency whose value is tethered to the US dollar. It therefore has the technological advantages of the blockchain but without the volatility of most cryptocurrencies.

Prior to the CFTC order the site had received a fair amount of publicity with one story lauding the site having a volume of transactions valued at more than $100 million.

Shutdown comes on the heels of ErisX failure

In December of 2020, a company called ErisX sought approval to offer a product that would have allowed for U.S. sportsbooks to hedge risks by trading products that were similar to other futures contracts.

While many in the industry saw ErisX as a novel means to manage risk across a national market, the operator pulled the proposal after it became apparent that the CFTC seemed likely to reject it.

A glimmer of hope?

While it became apparent that the CFTC was likely to reject the ErisX proposal one Commissioner, Brian D. Quintenz, issued a statement noting that had the CFTC ruled on the matter he would have dissented, stating:

“I would have dissented from the Order prohibiting the ErisX NFL contracts due to significant concerns around the statute’s constitutionality, the regulation’s validity, and the order’s arbitrariness.  Customarily, my dissent would be made moot by virtue of ErisX’s withdrawal, and my ability to comment on the Order therefore nullified.  But, because of the severity of these concerns and their implication for any future event contract filing, I feel compelled to release this statement to bring transparency to this debate and process. So….are you ready for some football?”

A second Commissioner, Dan M. Berkovitz, issued a statement after the withdrawal. He notes that if sporting event-based futures contracts are legal in future, they should not be restricted to certain categories of investors, like licensed sportsbooks. Rather, the public should be able to invest in these products as well.

Where Polymarket went awry

The CFTC order alleges that Polymarket violated various federal laws including the Commodity Exchange Act and CFTC regulations. These alleged violations took place between June 2020 and the date of the order January 3, 2022.

Polymarket agreed to a settlement with the CFTC, in which it neither admitted to nor denied the allegations. Nonetheless, the CFTC order summarizes the violations as operating an unregistered facility or non-designated contract market. In other words, the company lacked the necessary approvals and registrations to offer the products that they did.

In exchange for their cooperation, Polymarket received a reduced fine. Even so, they received a civil monetary penalty of $1.4 million. It has also agreed to cease and desist from violating the Commodity Exchange Act and CFTC regulations.

The site is to cease offering markets by Jan 14, unless they comply with CFTC regulations and federal law. Consumers should be able to access their funds in full no later than January 24, 2022. On that date, Polymarket must certify to the Commission that it no longer offers access to the markets.

Prediction markets incredibly useful, highly restricted

There’s broad consensus that prediction markets are a useful tool for gauging public opinion. This includes everyone from political pundits to the Defense Department.

Nonetheless, they face tight restrictions and regulations in the United States. In recent years there has been an uptick in companies seeking to offer event-based contracts lawfully. It’s possible to do this by going through the CFTC’s registration process, but few have succeeded. The most prominent prediction market, PredictIt, operates under a CFTC no-action letter, as opposed to having gone through the process of registering with the CFTC. It was only able to receive this informal permission because it’s not-for-profit and allows only small scale trading.

Such letters have allowed for the operation of similarly small prediction markets by other academic institutions as well. However, a great deal has changed in a short period of time. Much of the opposition to further expansion of prediction markets predates the Murphy decision at the Supreme Court. It seems possible that moving forward regulators and politicians will warm to permitting a greater number of prediction markets. This will in turn allow more Americans to wager on events other than sports.

 

- John Holden J.D. / Ph.D. is an academic. His research focuses on policy issues surrounding sports corruption.
Privacy Policy