CFTC fines Polymarket $1.4M, orders markets shutdown and user refund for non-compliance charges

• The CFTC has fined prediction markets service Polymarket $1.4M for failure to register as a binary options provider.
• The regulator has also ordered the shutdown of its prediction markets, and that the firm refunds all its users by Jan. 24.

The Commodity Futures Trading Commission (CFTC) has fined crypto betting service Polymarket $1.4 million for non-compliance with set regulations. The derivatives markets regulator has also ordered the shutdown of its prediction markets, in addition to making user refunds. The CFTC announced these penalties on Monday, saying they are being enforced since the company failed to register with the regulator.

Specifically, Polymarket did not apply for a Designated Contract Market (DCM) or Swap Execution Facility (SEF) registration. These are required under the Commodity Exchange Act (CEA) for companies offering binary options in the US.

Polymarket is a crypto predictions service that is owned and operated by the Delaware-registered Blockratize, Inc. The platform allows users to pick one of at least two options on given trades. An example is the winner of a presidential election among named persons.

Polymarket penalties for CEA violation

According to the CFTC, Polymarket offered 900 such prediction markets between June 2020 till date. The regulator further notes that these markets are swaps, and therefore liable to federal law.

Per the watchdog’s press release, Polymarket cooperated with the investigation, leading to a reduced fine. The company is to stop offering markets by Jan. 14 and make refunds to all its users by Jan. 24, per the order. The firm is also required to cease and desist from further violations of the CEA. Presently, a complete shutdown appears unlikely.

In a statement, Acting Enforcement Director Vincent McGonagle said,

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.

DeFi derivatives markets are under the CFTC domain

Of note, Bloomberg, in October 2021, reported that Polymarket was under investigation. An earlier in June 2021, now-former CFTC Commissioner Dan Berkovitz said DeFi markets for derivatives are under his agency’s jurisdiction, per his view.

“The CEA does not contain any exception from registration for digital currencies, blockchains, or smart contracts,” he said.

Polymarket in its official Twitter announced it has settled with the CFTC. Three of its markets that don’t comply with the CEA will be wound down. Additionally, all funds will be made available to users by Jan. 14. Polymarket expects to provide further information on the same soon.

“We have been encouraged by our learnings through this experience and have built out an exceptional compliance team and robust internal practices and procedures, which will ensure that compliance remains an integral pillar of Polymarket’s global business going forward,” the statement said.