On January 3, 2022, the Commodity Futures Trading Commission (“CFTC”) entered an order filing and simultaneously settling charges against Blockratize, Inc. (“Polymarket”), for offering off-exchange event-based binary options contracts, and failing to obtain registration as a swap execution facility (“SEF”) or designation as a designated contract market (“DCM”).
Polymarket had been operating an illegal unregistered or non-designated facility for event-based binary options online trading contracts, known as “event markets.” Polymarket advertised to the public to “bet on [their] beliefs” by buying and selling binary options contracts related to future events that are susceptible to a “yes” or “no” resolution (e.g., will Ethereum be above $2,500 on July 22). According to the order, Polymarket offered over 900 separate event markets since its inception, while enlisting smart contracts hosted on a blockchain to operate the markets.
Under the CFTC’s jurisdiction, these contracts, which were composed of a pair of binary options, constitute swaps. Therefore, they could only be offered on a registered exchange in accordance with CFTC and Commodity Exchange Act (“CEA”) regulations.
The order required Polymarket to pay a $1.4 million civil monetary penalty and to wind down all markets displayed on their website that do not comply with CEA and CFTC regulations.
New entrants can be surprised to learn that they engaged in an activity that is regulated and/or requires a license. We expect that other entities, particularly in the blockchain space, may find themselves the target of regulators for engaging in conduct that is regulated without realizing it; for instance, creating an NFT product that gives someone a chance to “win” additional NFTs or other prizes may involve operating a lottery, conduct which is subject to state laws in many states. And of course a number of DeFi projects may end up facing similar issues to those encountered by Polymarket.