In its first enforcement action in the cryptocurrency arena in 2022, on January 3, 2022, the United States Commodity Futures Trading Commission (CFTC) entered an Order filing and simultaneously settling charges against Delaware-registered Blockratize, Inc., which operated its business under the name Polymarket.
The Order finds that, beginning in approximately June 2020, Polymarket had been operating an illegal unregistered or non-designated facility for event-based binary options online trading contracts, known as “event markets.” According to the Order, through its website, Polymarket 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, 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 deploys smart contracts hosted on the Polygon blockchain to operate its markets.
As the Order explains, Polymarket market participants can buy or sell binary options contracts by “committing funds” directly through the Polymarket website’s graphical user interface. Market participants are charged a 2% fee on each transaction, which is used to compensate, on a pro rata basis, the liquidity providers who have provided liquidity to that specific market. Customers who want to make trades have to use the USDC stablecoin.
According to the order, Polymarket’s 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 Commodity Exchange Act (CEA) and CFTC regulations. Polymarket failed to obtain designation as a designated contract market (DCM) or registration as a swap execution facility (SEF).
The order requires that Polymarket pay a $1.4 million civil monetary penalty, facilitate the resolution (i.e. wind down) of all markets displayed on Polymarket.com that do not comply with the CEA and applicable CFTC regulations, and cease and desist from violating the CEA and CFTC regulations, as charged.