On June 28, 2024, the first televised debate between Biden and Trump attracted global attention. At the same time, the participation in the US election prediction on Polymarket, a world-renowned crypto prediction market platform strongly promoted by Vitalik Buterin, also increased. Data from the platform in June showed that Trump had a 62% chance of winning the election and Biden had a 23% chance of winning.
Just two days ago, on July 13, local time, a shooting occurred at a campaign rally held by Trump in Butler, Pennsylvania. A 20-year-old man fired up to eight bullets with an AR-style rifle, one of which passed by Trump's ear. Trump, who escaped the assassination, has a higher chance of winning the election than the others due to this incident, according to Polymarket.
As a politician who is good at using social media, Trump has previously reposted his odds on Polymarket on Truth Social, a media he founded, several times in a row. This not only helped him manage his own image, but also brought a lot of exposure to the platform.
However, are these crypto prediction market platforms compliant? This question remains to be discussed.
Article | Lawyer Shao Shiwei
01. What is the crypto prediction market?
The crypto prediction market is a decentralized DeFi protocol that allows anyone to trade the outcomes of events on smart contracts when specific conditions are met. Simply put, it allows users to use stablecoins to bet on the outcomes of various real-world events. If the prediction is correct, the user will gain benefits; if the prediction is wrong, the bet amount will be lost.
The first decentralized prediction market based on blockchain was Augur, which was launched on Ethereum in 2018. Ethereum founder Vitalik Buterin is a consultant to its development company. Perhaps this is one of the reasons why Vitalik has recently been pushing the prediction platform?
Currently, Polymarket is one of the world's largest prediction market platforms, especially the "2024 presidential election winner" bet launched on the platform, which ends on November 5, 2024. How popular is this platform? As of July 16, nearly $261 million has been bet on predicting the US election.
Of course, there are other major platforms in the current prediction market, including Gnosis, Azuro, Hedgehog, PlotX, SX, etc. It can be said that users have a lot of choices.
02. How the Crypto Prediction Platform Works
The main way to play on this type of platform is the binary prediction market, that is, users place bets on the platform to make predictions.
For example, if you think Trump has a greater than 71% chance of winning the 2024 U.S. presidential election, you can buy a share of "Yes" at 71 cents per share. If Trump is elected president of the United States, each share of "Yes" will be worth $1. The profit per share is 29 cents. Correspondingly, any user holding a share of "No" will lose all their shares.
In essence, the crypto prediction market platform provides a binary option product. Users have two options: "yes" or "no" for the outcome of the predicted event. This option is the option product obtained by the user.
03. Compliance Analysis of Crypto Prediction Market Platforms
Some people may wonder, isn’t this similar to a gambling platform? It’s just that there are more ways to play gambling. In fact, most countries and regions in the world do not have a clear definition of binary options products, but they are very strict and prudent in their regulatory attitude.
1. Regulatory attitudes of various countries
USA
OTC binary options are completely prohibited, and there are currently only two regulated exchanges that can provide binary options trading: NADEX and Cantor.
In 2022, the U.S. Commodity Futures Trading Commission (CFTC) filed a lawsuit against Polymarket, alleging that it failed to obtain registration as a designated contract market (DCM) and swap execution facility (SEF) under the Commodity Exchange Act (CEA). The platform paid a fine of $1.4 million and promised to reduce its services in the United States.
U.K.
Previously, the British government had positioned binary options as gambling in nature and regulated them by the Gambling Commission. However, this approach did not provide effective supervision and investor protection for binary options. In 2015, the British government began to discuss transferring the regulatory power of binary options from the Gambling Commission to the FCA. This change will officially classify binary options as financial instruments rather than gambling products.
China
In my country, binary options are not legal financial products. The Guiding Case No. 146 published by the Supreme People's Court, "Chen Qinghao and others suspected of opening a casino", clearly defines the operation of a binary options website as opening a casino. The court believes that the defendant used the Internet to solicit "investors" outside the legal futures trading venue in the name of "binary options" trading, and used the price trend of foreign exchange products in a certain period of time in the future as the trading object, and determined the profit and loss according to "buy up" and "buy down". "Investors" who bought the right direction of the rise and fall benefited, and the principal of the wrong purchase belonged to the website (dealer). The profit and loss results were not linked to the actual price increase or decrease. In essence, it was "betting on size and winning or losing", which was gambling behavior in the guise of option trading. The relevant websites should be identified as gambling websites.
2. Implicit ethical issues
In addition to the regulatory level, the prediction market also involves ethical issues. For example, the open prediction issues in the prediction market have also caused controversy among users before. For example, a user of the X platform asked, "Which stage of capitalism does betting on the death of others belong to?" and posted a screenshot of the odds on the prediction platform, which triggered a large number of users to criticize the platform.
In addition, there may be a risk of market manipulation in the prediction market. Participants with resources may influence market prediction results by investing large amounts of money, thereby damaging the interests of other participants.
At the same time, prediction markets may promote speculative predictions about event outcomes, which may sometimes be inconsistent with actual conditions, thereby contributing to the spread of misinformation. Especially in major social events (such as epidemics), erroneous prediction results may mislead the public and affect social stability.
04. Conclusion
As a prediction market based on blockchain, the crypto prediction market uses smart contracts to ensure fairness, transparency, and automatic distribution of rewards. Compared with the possible black-box operations of traditional online prediction platforms, the user experience will be better. In addition, because users need to invest real money to make predictions, such predictions may be much more accurate than questionnaires, expert arguments, etc. However, as mentioned above, the regulatory challenges and ethical issues of crypto prediction platforms have led to severe challenges in the compliance development of such platforms.
