CFTC Fines Unregistered Smart Contracts Platform for Enabling Events-Based Binary Options Trading | Practical Law

CFTC Fines Unregistered Smart Contracts Platform for Enabling Events-Based Binary Options Trading | Practical Law

The CFTC filed and settled charges against Blockratize Inc. d/b/a Polymarket for offering off-exchange binary options trading to US customers, who placed bets on certain enumerated future events, without registering with the CFTC as a swap execution facility (SEF) or designated contract market (DCM).

CFTC Fines Unregistered Smart Contracts Platform for Enabling Events-Based Binary Options Trading

by Practical Law Finance
Published on 13 Jan 2022 • USA (National/Federal)
The CFTC filed and settled charges against Blockratize Inc. d/b/a Polymarket for offering off-exchange binary options trading to US customers, who placed bets on certain enumerated future events, without registering with the CFTC as a swap execution facility (SEF) or designated contract market (DCM).
On January 3, 2022, the CFTC issued an order filing and settling charges against Blockratize Inc. d/b/a Polymarket, a website that offered access to smart contracts for purposes of placing bets on certain enumerated future events. The CFTC found that:
  • Polymarket operated a facility for the trading or processing of swaps without registration as a swap execution facility (SEF) or designated contract market (DCM) in violation of Section 5h(a)(1) of the Commodity Exchange Act (CEA) and CFTC Regulation 37.3(a)(1), which prohibits the operation of a facility that offers a trading system or platform in which more than one market participant is able to execute or trade swaps with other participants unless registered as a SEF or DCM.
  • Polymarket offered off-exchange commodity options for trading to US customers, in violation of CEA Section 4c(b) and CFTC Regulation 32.2(a), which make it illegal to offer, trade, process, execute, confirm the execution of, maintain a position in, or otherwise conduct activities related to commodity options transactions unless they are conducted subject to the CEA and CFTC Regulations.
Polymarket.com was an online trading platform that offered binary options in the form of winner-take-all "event contracts" allowing customers to bid on whether a given event will occur in the future. According to the CFTC, during the relevant period between June 2020 and present, Polymarket offered 900 event-based binary contracts, dozens of which were offered and accessible in the US. The contracts covered a variety of events, such as whether certain cryptocurrencies and digital assets would reach a certain value as of a certain date, as well as whether certain events or financial conditions would occur.
Market participants could open a Polymarket account by providing an email and a username. After registration, participants were required to use $USDCoin, the Ethereum-based stablecoin, for their transactions. The only oversight of the transactions offered on the platform was by Polymarket's markets integrity committee, composed solely of Polymarket personnel. Since Polymarket entered its beta phase in June 2020, it had over $130 million in trading volume. However, according to the order, Polymarket has not made any profits from those transactions.
Under the settlement agreement, Polymarket must cease and desist from the above activity and pay a civil monetary penalty of $1.4 million within 10 days of the date of entry of the order.