Author: flowie , ChainCatcher
Editor: Marco, ChainCatcher
As of August 14, Polymarket had placed bets on predictions related to the U.S. election that exceeded $600 million.
This massive bet has attracted the attention of US regulators, and the CFTC approved a proposal in May to ban event contracts for betting on political events.
On August 5, several U.S. senators and House representatives once again urged the CFTC to quickly finalize and implement this rule to prevent the commodification of U.S. elections.
Crypto giants Gemini, Crypto.com, Robinhood, Coinbase and other companies have collectively rebelled against the CFTC, believing that the latter has no right to regulate the prediction market.
Behind the game between the two parties may be the crypto giants' preference for the online prediction market.
Currently, the total transaction volume of the crypto prediction market is about $2 billion, but there is a much bigger market behind it. The global online gambling market is expected to grow from $60.63 billion in 2023 to $103.74 billion in 2028.
Prediction Markets and the CFTC Feud
In 2022, after being sued by the CFTC, Polymarket withdrew from the US market and paid US$1.4 million to reach a settlement.
The CFTC alleges that Polymarket offered over-the-counter binary options contracts but failed to obtain registration as a designated contract market (DCM) and swap execution facility (SEF) under the Commodity Exchange Act (CEA).
Binary options are speculations on the changes in the price of the underlying asset and the exercise price after a certain trading period, and are divided into call options or put options.
Shao Shiwei, an attorney at Mankiw LLP, once wrote that, in essence, the crypto prediction market platform does provide a binary options product, where users have two options: "yes" or "no" for the outcome of the predicted event, and this option is the option product obtained by the user.
Under the regulatory environment of the United States, over-the-counter binary options are completely prohibited, and only two major exchanges, the North American Derivatives Exchange (Nadex) and the Cantor Exchange, are allowed to provide legal binary options transactions. In addition, the United States stipulates that brokers can only choose to cooperate with payment service providers in the United States to monitor the whereabouts of funds.
The CFTC has repeatedly penalized prediction platforms that offer over-the-counter binary options.
In 2012, the year of the US presidential election, InTrade, an Irish economic and political betting website founded in 1999, was the most cited betting website in the election. The New York Times cited Intrade's data as many as 68 times in one year.
InTrade, which gained "huge wealth" through the US election, soon encountered "catastrophe". At the end of 2012, InTrade was sued by the CFTC as an illegal market and was forced to shut down its business in the United States.
A year after losing the US market, InTrade announced bankruptcy and liquidation due to a capital shortage of US$700,000.
PredictIt, a crypto prediction market platform founded in 2013, received a special exemption from the CFTC in 2014. However, the condition was that it was a non-profit research in cooperation with Victoria University of Wellington in New Zealand, and the maximum investment amount in any single contract was $850. The limit on the investment amount also led to a limit on its trading volume.
In August 2022, the CFTC revoked the special exemption and required PredictIt to cease operations. Finally, PredictIt chose to sue the CFTC.
Kalshi, a prediction platform founded in 2018 and once led by Sequoia Capital, was also banned by the CFTC in September last year from listing prediction contracts related to the US election.
Earlier this year, Kalshi and its CEO Tarek Mansour filed a complaint with the CFTC, claiming that the CFTC had violated the Administrative Procedure Act and that the contract was not within the CFTC's regulatory scope.
Kalshi, who argues that such contracts are a classic way to hedge risk, asked the court to vacate the CFTC’s ruling that found Kalshi engaged in illegal gambling “against the public interest.”
Regarding binary options products, lawyer Shao Shiwei said that although not only the United States, but most countries or regions in the world have not made clear definitions of binary options products, their regulatory attitudes are very strict and prudent.
For example, China defines binary options as illegal financial products. The Supreme People’s Court’s Guiding Case No. 146, “Case of Chen Qinghao and Others Suspected of Opening a Casino,” clearly defines operating a binary options website as opening a casino.
The UK government classifies binary options as financial instruments, and operating binary options products in the UK requires authorization from the FCA.
Challenging the CFTC’s Regulatory Authority
Earlier this year, after the prediction platform Kalshi sued the CFTC, it received support from Paradigm, a venture capital firm that is optimistic about the prediction market.
Paradigm believes that prediction market contracts can help businesses, including crypto startups, hedge risks and have a positive spillover effect on the general public.
Paradigm also said that the prediction platform may become an important killer application in the encryption field. According to 1kx analyst Mikey, the total transaction volume of the encryption prediction market is currently about 2 billion US dollars.
However, there is a bigger market behind it. According to Mordorintelligence data, the online gambling market size is expected to grow from US$60.63 billion in 2023 to US$103.74 billion in 2028.
Faced with huge market opportunities, crypto giants attempting to enter this field openly challenge the CFTC.
Public opponents also include crypto institutions such as Gemini, Crypto.com, Robinhood, Coinbase and investment institutions such as Dragonfly.
There are two main reasons: first, contracts predicting political events have a positive impact on elections, and the CFTC should not choose to stifle the rights of American citizens to access these powerful markets; second, the U.S. CFTC does not have the power to regulate.
Jessica Furr and Bryan Edelman, two legal counsels at crypto venture capital Dragonfly, wrote in a letter to the CFTC: “Political event contracts should not be equated with gambling games such as the Super Bowl. On the contrary, elections have significant economic impacts. These contracts are designed to perform key risk hedging functions, comply with the requirements of the Commodity Exchange Act (CEA), and provide valuable predictive data to the public.”
Dragonfly participated in Polymarket’s $45 million Series B round in May this year.
Gemini founder Winklevoss believes that unlike opinion polls, experts or expert opinions, prediction markets require participants to do what they say - their interests are at stake, and "decentralized prediction markets are a major innovation with real public utility."
Coinbase chief legal counsel Paul Grewal said: “The proposal fails to recognize the public interest in prediction markets.”
For the stakeholders of the prediction platform, after the prediction market has been severely cracked down by the CFTC many times in the past, they still have the confidence to openly oppose the US CFTC this time. An important point may be that a 40-year-old Chevron Rule was overturned by the US Supreme Court at the end of June.
With the overturning of the Chevron Rule, which allowed federal agencies to enforce regulations based on their own interpretations of sometimes vague laws, the authority of agencies such as the CFTC will be weakened.
Dragonfly’s legal department also mentioned that after the U.S. Supreme Court overturned the Chevron Rule, the CFTC must ensure that it has the power to regulate these contracts.
Coinbase said the CFTC’s definition of gambling was too vague. Steve Humenik, senior vice president of Crypto.com, said the CFTC “is neither a gambling regulator nor an election regulator and is not qualified to regulate this market.”
The overturning of the Chevron Rule poses a significant challenge to the CFTC's regulatory authority.
Polymarket’s long-term and short-term concerns
Prior to the settlement with the CFTC, the U.S. share of traffic ranged from 34% to 54%, according to Similarweb.
After reaching a settlement with the CFTC in 2022, Polymarket announced its withdrawal from the United States. However, 25% of the visitors to the Polymarket website are still from the United States.
In a recent article exposing Polymarket, Forbes said that Polymarket founder Coplan did not comment on the geo-blocking measures of its platform.
This year, due to the surge in trading volume caused by the US election and the Olympic Games, Polymarket’s cumulative trading volume has exceeded $1 billion. Among them, the trading volume from July 1 to 30 exceeded $300 million.
The vast majority of trading volume on Polymarket comes from the US election, and the predicted bonus pool for the winner of the 2024 US presidential election has even reached US$600 million.
Similar to InTrade, a political and economic betting website that became popular in the 2012 election year, Polymarket has also become a source of citation for many professional media such as Bloomberg due to its election predictions.
It is hard to say that the US CFTC's plan to push for a ban on contracts such as election predictions is not aimed at Polymarket.
Polymarket offers what are essentially binary options products, which are strictly regulated in most of the world, except in the United States.
In addition to regulatory issues, Polymarket also faces the question of whether its popularity is sustainable and pressure from competitors.
Polymarket currently only has a certain amount of traffic in the short-term topics that the crypto industry is more concerned about, such as the US election.
Although Polymarket’s non-election market trading volume continues to grow, it still receives relatively little attention. As the 2024 US election comes to an end at the end of the year, how will Polymarket’s trading volume be maintained in the future?
Bhargava of Polymarket backer General Catalyst isn’t worried, arguing that there are always big events happening besides the election, perhaps even more so in an increasingly turbulent world.
Polymarket has also recently been working to improve its platform’s content generation capabilities and coverage by expanding channels and improving prediction accuracy.
On July 30, Polymarket’s prediction market was embedded in the well-known content subscription payment platform Substack. On August 13, Polymarket announced a partnership with AI-driven search engine Perplexity to provide users with news summaries of real-time events.
As for competitors, Web3 data platform RootData has included more than 50 crypto prediction market projects.
According to data analysis by 1kx analyst mikey, if the sports market is included, the transaction volume of Azuro and SX Network is closer to Polymarket in terms of overall transaction volume from the beginning of the year to date.
Some potential competitors are emerging, such as Limitless Exchange running on EVM, Hedgehog Markets of Solana ecosystem, and multiple prediction platforms such as Drift Exchange, xMarkets, Inertia Social, Doxa, Contro, etc. that are still under development.
Image source: 1kx analyst mikey
Recently, MetaDAO, a Solana ecosystem governance project that can be used for prediction markets, also received investment from Paradigm.
Rivals in traditional finance can’t be ignored either. In April, billionaire Jeff Yass’s trading firm Susquehanna International formed an independent unit to try to build a market on Polymarket’s competitor, Kalshi.
