Polymarket under CFTC’s Microscope for Derivative Trading

Polymarket, a New York-based cryptocurrency wagering platform, is under investigation by the US Commodities and Futures Trading Commission (CFTC) for breaking financial rules, Bloomberg reported over the weekend.

Trading with Derivatives

Tasked with regulation for derivatives trading, the CFTC launched a probe into Polymarket, investigating whether the platform is allowing its customers to trade swaps or binary options against the rules and whether it should be registered with the watchdog, unnamed in the media report sources claim.

Polymarket is firmly committed to complying with applicable laws and regulations and to providing information to regulators that will assist them with any inquiry.”

Spokeswoman, Polymarket

Though not accused by the watchdog of any wrongdoing at this time, if found in breach of financial trading rules, Polymarket could be sanctioned with hefty fines and face restrictions on some of the products it offers.

A quick look at Polymarket website uncovers bets like “Will Donald Trump be the 2024 Republican presidential nominee,” “Will J.Lo and Ben Affleck get engaged by Thanksgiving” and “Will Nicki Minaj get the Covid-19 vaccine by November 29.” These, in essence, represent binary options.

In a similar situation and facing tough questions from the CFTC, cryptocurrency exchange ErisX decided to withdraw its proposal to offer futures contracts based on games from the NFL, a market that would have been largely entertained as a hedging tool by sportsbooks.

According to a previous statement made by Polymarket founder Shayne Coplan, the platform has “tremendous social value,” allowing via price discovery “to get this perpetually accurate forecast about the future of a given event.”

Lack of Coin Regulation

But the CFTC is also worried that the currency in which Polymarket customers place their bets, USD Coin, a stablecoin backed by Coinbase Global and pegged to fiat currencies but largely unregulated, have grown in value and started putting consumers at risk or even pose a threat to the financial stability in case Bitcoin and the other cryptocurrencies suddenly crash. According to data provided by CoinMarketCap, the USD Coin market value is currently $32.4 billion, more than eight times larger than $3.9 billion at the end of 2020.

Polymarket, which nether takes custody of money or digital tokens, nor the other side of customer trades, but just displays existing betting markets on the Ethereum blockchain, hired the services of James McDonald, a partner at law firm Sullivan & Cromwell and a former head of CFTC’s enforcement division, to handle the probe.