Polymarket
Crypto predictions platform Polymarket fined $1.4M by CTFC
“All derivatives markets must operate within the bounds of the law regardless of the technology used,” said Acting Director of Enforcement Vincent McGonagle.
New York-based crypto predictions platform Polymarket has reached a settlement with the Commodity Futures Trading Commission (CFTC) to pay a fine of $1.4 million.
Polymarket is a decentralized platform that enables users to bet on the outcomes of event markets such as pro-sports games and political elections via binary options contracts.
On Jan. 3, the CFTC announced that it had entered an order filing and simultaneously settling charges against Polymarket, with the platform found to have operated an “illegal unregistered or non-designated facility” since June 2020.
Under the order, Polymarket is required to pay a civil monetary penalty of $1.4 million along with winding back any markets on the platform that do not comply with CFTC and Commodity Exchange Act (CEA) regulations. Polymarket responded with a Jan 4. tweet stating that they were "excited to move forward".
We’re pleased to confirm that we've successfully agreed to a settlement with the CFTC, & are excited to move forward & focus on the future of Polymarket.
— Polymarket (@PolymarketHQ) January 3, 2022
As per the order, the 3 markets lasting past 1/14 that don't comply with the Act will be prematurely resolved. More soon
The CFTC stated that event market contracts backed by a pair of binary options “constitute swaps” under its jurisdiction and that platforms offering exposure to the market must be regulated under the CFTC and CEA.
In the announcement, the CTFC’s acting director of enforcement Vincent McGonagle urged derivatives platforms to register with the enforcement body, he paid particular attention to those operating in the decentralized finance (DeFi) sector:
“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.”
The CFTC did note, however, that Polymarket received a reduced civil monetary penalty due to its “substantial cooperation” with the investigation into the platform.
Related: Will US regulators shake stablecoins into high-tech banks?
Cointelegraph reported back in October 2021 that the CFTC had launched its investigation into Polymarket, with the platform reportedly hiring former CTFC enforcement head James McDonald to handle the probe.
CFTC Shuts Down Polymarket
CFTC reportedly investigating decentralized prediction platform Polymarket
Polymarket is believed to have hired CTFC enforcement head James McDonald to handle the probe.
New York-based decentralized prediction market Polymarket has come under investigations from the United States Commodity Futures Trading Commission (CFTC).
According to an Oct. 23 report from Bloomberg citing anonymous sources, the CFTC is investigating whether Polymarket is allowing its customers to trade binary options and swaps that should be registered with the financial regulator. The CFTC is yet to confirm whether it is investigating Polymarket.
A spokesperson for the platform stated: “Polymarket is firmly committed to complying with applicable laws and regulations and to providing information to regulators that will assist them with any inquiry.”
The report claims that the company has engaged the former director of the CFTC’s enforcement division and current partner at legal firm Sullivan & Cromwell, James McDonald, to address the probe.
Polymarket hosts a variety of novelty predictive markets that allow users to speculate on the outcome of future events using the USD Coin stable token. Polymarket does not take positions against its customers and hosts the smart contract interface allowing users to interact with the protocol.
The report asserts the investigation comes as Polymarket is in talks to secure a new round of funding, with anonymous sources claiming the raise could see the firm valued at close to $1 billion.
In October 2020, Polymarket secured a $4 million funding round led by Polychain Capital that also saw participation from CoinShares CSO Meltem Demirors, former Coinbase CTO Balaji Srinivasan, and AngelList CEO Naval Ravikant.
Related: Crypto in the crosshairs: US regulators eye the cryptocurrency sector
Polymarket is not alone in offering decentralized prediction markets, with Augur launching a Polygon deployment of its platform at the start of October.
While Polymarket offers an eclectic range of markets including speculation on covid case numbers, CryptoPunks floor prices and Donald Trump’s presidential prospects, Augur markets are currently focussed on sporting events and crypto price forecasting.
How This Millionaire Economist Trades Crypto Prediction Markets
An anonymous trader with a Ph.D. in economics walked Crypto Briefing through the risks and methodology of being a big player in the crypto prediction markets.
How to Predict the Future
Insight_Predict, henceforth referred to as IP, is a seasoned options trader who became active on the PredictIt and BetMoose betting platforms years ago, recently moving into the Polymarket crypto prediction platform. They now have over half of their net worth on these prediction markets.
Turns out yesterday was a good day to take profits on my calls. Here's a sampling of the profits I booked yesterday. The biggest profits were on Exxon-Mobil calls. I am basically treading water on BP calls, but wanted to lighten my load and reduce risk. https://t.co/wdVqx7pNM5 pic.twitter.com/WUnt2d8DHV
— Insight Prediction (@Insight_Predict) February 17, 2021
IP explained the logic behind the move towards crypto sites, saying, “I think peer-to-peer betting markets are a great innovation relative to the old-fashioned ‘betting against the house’ [system].”
Centralized platforms are notorious for issuing low betting limits and often banning or limiting successful users to ensure profits.
However, sites like Polymarket don’t have risk management features like setting a stop loss. This particular trader embraces these risks but backs up bets with extensive research.
“I place extremely high-risk wagers both when I’m trading options, and when I’m trading on Polymarket generally.”
The trader added that they also placed low-risk bets on Biden to be inaugurated, with a 9% return and President Trump not to become President after losing the election.
Curiously, as of March 2021, traders can still bet that Donald Trump will become president of the USA by the end of the month.
The odds are now so low that Polymarket’s 2% fees would outweigh the 1% gain. Still, traders could have made 7% minus fees as recently as February, highlighting the difference between the “house always wins” platforms and less centralized crypto markets.
Research Methods
Research and risk management consists of reading about and discussing the topic online, including discord servers for each betting site. IP also sets Google Alerts for relevant market topics.
“Thus far this year, I’ve made more money on Polymarket than in my salaried day job, and I’m not doing it full time, which hurts my performance. Doing well on Poly generally requires staying on top of the news and doing research.”
The research is, of course, crucial to long-term success. One popular prediction market is now taking bets on whether the Biden administration will vaccinate 100 million people before Apr. 1.
Traders keep an eye on CDC cutoff times for vaccine reporting each day and calculate the moving average of vaccinations to predict results.
“For the vaccine markets, for example, it’s helpful to really dive into the data. I’ve run some regressions using the vaccine data but it’s mostly just looking at the trends in the data and in taking a big-picture perspective.”
It turns out that the number of vaccines administered has a pretty close relationship with the number of unused vaccines distributed. This suggests that should the # of vaccines increase the next few weeks, doses should rise roughly in proportion. pic.twitter.com/n1UBOFz28Q
— Insight Prediction (@Insight_Predict) March 9, 2021
Some Polymarket traders have programmed and released their own models to forecast trends in the vaccination rollout.
I have a model at https://t.co/VZoPABtf2C that predicts how many 2nd doses will be needed based on month-ago first doses, and therefore how many will be left for first doses. pic.twitter.com/1nbY7zsSXk
— Scott Leibrand (@scottleibrand) March 7, 2021
Shortcomings of Prediction Markets
The lack of risk management features makes it imperative that traders rely on automated alerts and constant vigilance for such volatile markets. These prediction markets are still in their infancy in relative terms, with limited features and events to bet on.
The underlying technology also comes with drawbacks as well as benefits. Polymarket and major competitor Augur have both been affected by ongoing congestion on the Ethereum network.
Polymarket actually runs on Polygon, an Ethereum sidechain. However, deposits and withdrawals of USDC, the only supported currency, have been slow and expensive of late due to high Ethereum traffic and fees. This issue is widespread throughout Ethereum and the DeFi ecosystem.
IP aims to tackle these issues by launching a new predictions market in the coming year, allowing users to buy and sell crypto directly, among other features.
The space will likely see the launch of increasingly sophisticated platforms and features. With so much demand and money on the line, truth-seekers and market researchers should keep a close eye.
Disclosure: The author held Bitcoin at the time of writing