Credit: Kalshi
The house always wins, and online prediction markets are proving to be no exception—for now. Polymarket, one such offshore prediction site, allows users to place bets on topics such as the economy, sports, and most notably, political outcomes. The platform’s United States Presidential Election contest—where bettors could place wagers using cryptocurrency on either candidate—registered a staggering $3.2 billion in total trading volume before it eventually resolved in President-Elect Donald Trump’s favor. Polymarket drew attention as a result, given its uncanny ability to challenge predictive models—and be correct. Currently, United States residents are not allowed to place bets on Polymarket. Yet, the billions of dollars that flowed through just a single contest would suggest that domestic users could be slipping through the cracks. Can anything be done to slow that tide?
The Regulatory Framework of Election Betting Gives The Federal Government Broad Authority
Prediction markets are primarily regulated under the Commodity Exchange Act (CEA), with the Commodity Futures Trading Commission (CFTC) acting as the regulatory arm to enforce the CEA. Legally, the predictions (i.e., the wagers) placed by users on these markets are considered a subset of derivative contracts, which are regulated by the CFTC, known as “event contracts.” However, under the CEA, only federally regulated exchanges, known as “Designated Contract Markets,” can offer event contracts. These Designated Markets are allowed to self-certify themselves to the CFTC, certifying that their contracts comply with CEA and CFTC regulations. Once the self-certification is submitted, Designated Markets can begin trading event contracts the following day. However, it is not necessarily all smooth sailing from there.
The CEA includes a “Special Rule,” which allows the CFTC to review and prohibit specific types of event contracts if it determines that a contract is contrary to the public interest. The Special Rule provides five separate categories. If the CFTC determines an agreement, contract, or transaction falls into a category, it can be deemed contrary to the public interest. For example, gaming (i.e., gambling) brings event contracts into the purview of the Special Rule. The Rule itself provides even more sweeping authority to the CFTC, including a sixth catch-all category: “other similar activity determined by the Commission, by rule or regulation, to be contrary to the public interest.” The CFTC has ninety days to determine whether to block an event contract, during which time the Designated Market cannot list or trade the contract. Thus, the agency has sweeping authority to shut down certain activities, under the expansive guise of the “public interest.”
Polymarket’s Run-Ins With the Law, And Where We Go From Here
Polymarket has already brushed up against regulators. In 2022, the company incurred a $1.4 million civil penalty levied by the CFTC as part of a larger settlement. The penalty was the culmination of charges brought by the CFTC, alleging that Polymarket had been operating an illegal unregistered market for event contracts since June of 2020. Polymarket had simply skipped the step of registering as a Designated Contract Market, pursuant to CFTC regulations. Therefore, the CFTC did not even need to reach the issue of whether the online wagers were contrary to the public interest (pursuant to the Special Rule), because the site plainly did not comply with the registration procedures.
Pursuant to the settlement, Polymarket was required to cease and desist all violative activity, essentially estopping it from offering contract event trading in the United States. Why Polymarket did not register with CFTC is an open question. Did it suspect that even when registered, the CFTC would find its activities “contrary to the public interest?”
The $1.4 million penalty assessed in 2022 is now looking like chump change for Polymarket. As stated at the outset, the company saw record trading volume for its U.S. election market, to the tune of billions of dollars. Of course, there is a possibility that all of this trading volume is occurring offshore, but that seems far from certain.
The question becomes whether the CFTC’s actions were simply toothless or if the age of online election betting is beyond the reach and control of federal regulators. The answer to that may be somewhere in the middle. As things currently stand, Polymarket does not collect customer’s personal information, so outside of its Internet Protocol (IP) Address, it knows very little about where the money is flowing from. This is problematic from a regulatory standpoint, because although U.S. residents currently are not allowed to place wagers on Polymarket, they can easily sidestep that barrier using what’s known as a Virtual Private Network (VPN).
The sheer scale of VPN usage in this context is not specifically known, but the combination of the technology’s ease of access and some anecdotal use cases would suggest that it could be quite pervasive. And if the Department of Justice’s current allegations against Polymarket are true, then the site may not even be trying to turn away U.S. bettors, regardless of IP address. The site could implement “geo-fencing,” which could categorically block off U.S. IP addresses, but it remains unclear whether this solves the VPN issue. If a U.S. user persists in trying to place bets even when they are geo-fenced, the question then becomes whether the site should even be liable at all for its users actions. The CFTC ordered Polymarket to “wind down” its U.S. offerings in 2022, but there was no specific instruction on how that ought to be implemented. A more tech-forward, practical solution may be needed if the federal government’s aims of tapering down election betting are to be met.
Although the election has ended, Polymarket’s time in the spotlight may have only begun. On November 13, 2024, federal law enforcement raided the New York home of Polymarket’s CEO Shayne Coplan, and investigations around the site have continued to swirl. Election integrity has been under the microscope since the 2016 election, and with the sheer size of these influential markets, it may be time for regulators to provide real safeguards. The house shouldn’t win when democracy is involved.
*The views expressed in this article do not represent the views of Santa Clara University.