CFTC fines Polygon-powered binary options platform Polymarket $1.4 million
UPDATE: Polymarkets has clarified it will not be shutting down.
The Commodity Futures Trading Commission has settled charges against binary options platform Polymarket, operated by Delaware-registered Blockratize, Inc.
The platform offered off-exchange event-based binary options contracts and failed to obtain designation as a designated contract market (DCM) or registration as a swap execution facility (SEF).
As part of the settlement deal, Polymarket has agreed to pay a $1.4 million civil monetary penalty and to wind down all markets displayed on Polymarket.com that do not comply with the Commodity Exchange Act (CEA) and applicable CFTC regulations.
Yes or No questions
According to the CFTC, Polymarket had been operating an illegal unregistered or non-designated facility for event-based binary options since June 2020.
Polymarket.com offered the public the opportunity to “bet on your beliefs” by buying and selling binary options contracts related to an event taking place in the future that are susceptible to a “yes” or “no” resolution, according to its website.
The binary options platform allowed users to trade events such as: “Will $ETH (Ethereum) be above $2,500 on July 22?”; “Will the 7-day average COVID-19 case count in the U.S. be less than 15,000 for the day of July 22”; “Will Trump win the 2020 presidential election?”.
Polymarket has offered more than 900 separate event markets since its inception, according to the CFTC, which added the binary options platform creates, defines, hosts, and resolves the trading and execution of the contracts.
“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, said Acting Director of Enforcement Vincent McGonagle.
“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.”
Event market contracts constitute Swaps
Under the CFTC’s jurisdiction, event market contracts, each of which is composed of a pair of binary options, constitute swaps and therefore can only be offered on a registered exchange.
Polymarkets was found to have offered substantial cooperation with the Division of Enforcement’s investigation and was awarded a reduced civil monetary penalty.
The CFTC has issued several customer advisory protection warnings, including Avoid Unregistered Binary Options Trading Platforms and Beware of Off-Exchange Binary Options Trades, which advise customers that there are registered binary options exchanges in the U.S.
The blockchain technology on the Polymarkets infrstructure is powered by Polygon. The platform, owned by Blockratize disclaims that “Polymarket is for informational and educational purposes only”.
“We take no custody of anyone’s money or cryptocurrency, extract no profits, nor do we host any markets ourselves. Polymarket displays existing markets live on the Ethereum blockchain (or sidechains) and is a graphical user interface for both visualizing data and market trends from on-chain activity, and interacting with said smart contracts directly via your Web 3 enabled wallet.”
Polymarket will not shut down
Polymarket has released a statement regarding the probe, the civil penalty, and the future of the company. The firm clarified it will not be shutting down.
“We are pleased to confirm that we have successfully agreed to a settlement with the CFTC and are excited to move forward and focus on the future of Polymarket. We have been encouraged by our learnings through this experience and have built out an exceptional compliance team and robust internal practices and procedures, which will ensure that compliance remains an integral pillar of Polymarket’s global business going 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.
“DeFi presents unique challenges to both builders and regulators, and Polymarket remains committed to working with regulators to ensure that the rules currently governing digital assets and DeFi are sufficiently clear, allow for innovation in the United States, and protect individuals’ interests and the integrity of U.S. markets. 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”.
“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. We are thrilled to put this settlement behind us, and are prepared and excited for the next chapter.”