Polymarket: CFTC fines and orders digital currency betting service to shut down

Polymarket: CFTC fines and orders digital currency betting service to shut down

A digital currency service that allowed users to bet on whether Donald Trump would retain the U.S. presidency or the number of COVID-19 cases in any particular day has been fined by a U.S. regulator. Polymarket is set to pay a $1.4 million penalty and wind down its services this month.

Polymarket began operations in June 2020, offering its users event-based binary options trading contracts, otherwise known as event markets. Users could place a bet on the probability of an event taking place and stand to win if their bet came to pass. 

Such bets varied from the U.S. presidential elections outcome, whether a given digital currency would hit a certain price point by a given date, the number of COVID cases, whether Hollywood stars Ben Affleck and Jennifer Lopez would be engaged, if Elon Musk’s rockets would reach outer space by year-end, and much more.

According to the U.S. Commodity Futures Trading Commission (CFTC), since Polymarket’s inception in 2020, it has offered over 900 separate event markets. It used smart contracts to operate the markets. “Polymarket creates, defines, hosts, and resolves the trading and execution of contracts for the event-based binary option markets offered on its website,” the regulator says.

The CFTC alleges that Polymarket has been violating the Commodity Exchange Act (CEA) and other applicable CFTC regulations with its products. It said that the market contracts the platform offered constitute swaps under the CFTCs jurisdiction, and therefore, they can only be offered by entities that have complied with the CEA and been licensed by the CFTC.

The platform had to pay a $1.4 million civil monetary penalty for the offense, which would have been substantially bigger, but the regulator went easy as Polymarket was reportedly quite cooperative. It also has to wind down all the services that don’t comply with the CEA and cease and desist from violating any more CEA or CFTC regulations.

“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 acting director of enforcement at the CFTC, remarked.

“Market participants should proactively engage with the CFTC to ensure that our markets remain robust, transparent, and afford customers the protection provided under the CEA and our regulations,” McGonagle added.

Polymarket has been under investigation by the commodities regulator for quite some time now, with Bloomberg first reporting about it in October 2021. At the time, the platform was revealed to have facilitated some four billion shares since its launch. It was also said to be in talks with investors at a $1 billion valuation. 

Led by 23-year-old founder Shayne Coplan, the firm relies solely on USD Coin (USDC), a stablecoin issued by a conglomerate that Circle Financial and Coinbase lead. Alongside Tether, USDC was among the stablecoins that minted new tokens ceaselessly last year, shooting up from less than $4.5 billion in January to now have a $43 billion market cap. 

In preparation for the CFTC showdown, Polymarket hired James McDonald, a partner at Sullivan & Cromwell LLP. McDonald was the former head of the CFTC’s enforcement division—the same division that was coming after Polymarket— until 2020.

In a statement shared with CoinGeek, Polymarket said it’s satisfied with the settlement and pledged to make compliance an essential facet of its growth moving forward.

“We appreciate that in today’s resolution, the CFTC recognizes our substantial cooperation and efforts to date to engage with them transparently on these topics and to educate them on the architecture and foundational DeFi primitives underlying Polymarket. We remain optimistic and look forward to a productive relationship with the CFTC that carves out a compliant path for DeFi products in the future,” the company said. “As stated in the order, the three markets set to resolve after January 14, 2022 that do not comply with the Act will be prematurely wound down and participants refunded. An announcement on the future of Polymarket will be released in the coming days.”

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—a from BitMEX to BinanceBitcoin.comBlockstreamShapeShiftCoinbaseRipple
EthereumFTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.

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