Support Polymarket, challenge the CFTC, and crypto giants target the hundred billion dollar online gambling market

Author: flowie, ChainCatcher

Editor: Marco, ChainCatcher

As of August 14, over $600 million has been wagered on predictions related to the U.S. elections on Polymarket.

This massive betting has caught the attention of U.S. regulators, with the CFTC approving a proposal in May to prohibit event contracts that allow betting on political events.

On August 5, several U.S. senators and House representatives urged the CFTC to quickly finalize and implement this regulation to prevent the commodification of U.S. elections.

Cryptocurrency giants such as Gemini, Crypto.com, Robinhood, and Coinbase have collectively opposed the CFTC, arguing that it lacks the authority to regulate prediction markets.

Behind the standoff may be the crypto giants' preference for online prediction markets.

Currently, the total trading volume in crypto prediction markets is about $2 billion, but there is a larger market behind it. The global online gambling market is expected to grow from $60.63 billion in 2023 to $103.74 billion in 2028.

The Grudge Between Prediction Markets and the CFTC

In 2022, Polymarket exited the U.S. market after being sued by the CFTC and paid $1.4 million to settle.

The CFTC argued that Polymarket offered over-the-counter binary options contracts without obtaining registration as a designated contract market (DCM) and swap execution facility (SEF) as specified in the Commodity Exchange Act (CEA).

Binary options are speculative contracts based on the price movement of an underlying asset after a certain trading period, categorized as either call (bullish) or put (bearish) options.

Lawyer Shao Shiwei from Mankiw Law Firm stated in a post that, in essence, crypto prediction market platforms do provide a type of binary options product, where users have two options—"yes" or "no"—regarding the outcome of the predicted event, which constitutes the options product they receive.

In the regulatory environment of the U.S., over-the-counter binary options are completely banned, with only two exchanges, the North American Derivatives Exchange (Nadex) and Cantor Exchange, allowed to offer legal binary options trading. Additionally, U.S. regulations require brokers to collaborate only with domestic payment service providers to monitor the flow of funds.

The CFTC has repeatedly penalized prediction platforms that offer over-the-counter binary options.

In 2012, also a U.S. election year, the Irish political and economic betting website InTrade, established in 1999, was the most cited betting site during the election events. The New York Times cited InTrade's data as many as 68 times in one year.

Having gained immense wealth from the U.S. elections, InTrade soon faced "catastrophe." At the end of 2012, InTrade was sued by the CFTC as an illegal market and was forced to shut down its operations in the U.S.

A year after losing the U.S. market, InTrade announced bankruptcy due to a $700,000 funding shortfall.

Founded in 2013, the crypto prediction market platform PredictIt received a special exemption from the CFTC in 2014. However, the condition was that it was a non-profit research project in collaboration with Victoria University of Wellington in New Zealand, with a maximum investment amount of $850 in any single contract. The investment limit also restricted its trading volume.

In August 2022, the CFTC revoked the special exemption and ordered PredictIt to cease operations. Ultimately, PredictIt chose to sue the CFTC.

Founded in 2018, the prediction platform Kalshi, which received investment from Sequoia Capital, was also banned by the CFTC from listing prediction contracts related to the U.S. elections last September.

Earlier this year, Kalshi and its CEO Tarek Mansour filed a complaint against the CFTC, claiming that the CFTC violated the Administrative Procedure Act and that the contract was not within the CFTC's regulatory scope.

Kalshi argues that such contracts are a classic way to hedge risks and requests the court to overturn the CFTC's ruling, which deemed Kalshi's activities as "contrary to public interest" and engaged in illegal gambling.

Regarding binary options products, lawyer Shao Shiwei noted that not only in the U.S. but also in most countries or regions around the world, while there is no clear definition of binary options products, the regulatory attitude is very strict and cautious.

For example, China has classified binary options as illegal financial products, with the Supreme People's Court's Guiding Case No. 146 clearly defining the operation of binary options websites as establishing a casino.

The UK government classifies binary options as financial instruments, requiring FCA authorization to operate binary options products in the UK.

Challenging the CFTC's Regulatory Authority

Earlier this year, after suing the CFTC, the prediction platform Kalshi received support from venture capital firm Paradigm, which is optimistic about prediction markets.

Paradigm believes that prediction market contracts can help businesses, including crypto startups, hedge risks and have positive spillover effects on the public.

Paradigm also stated that prediction platforms could become significant killer applications in the crypto space. According to analyst Mikey from 1kx, the total trading volume in crypto prediction markets is currently about $2 billion.

However, there is a larger market behind it. According to Mordor Intelligence, the online gambling market is expected to grow from $60.63 billion in 2023 to $103.74 billion in 2028.

In the face of huge market opportunities, crypto giants attempting to enter this field are openly challenging the CFTC.

Public opponents also include crypto institutions like Gemini, Crypto.com, Robinhood, Coinbase, and investment firms like Dragonfly.

The main reasons are twofold: first, the prediction contracts for political events have a positive impact on elections, and the CFTC should not stifle the rights of U.S. citizens to access these powerful markets; second, the CFTC lacks the authority to regulate.

The two legal advisors of crypto venture capital Dragonfly, Jessica Furr and Bryan Edelman, wrote in a letter to the CFTC: "Political event contracts should not be equated with gambling games like the Super Bowl. Instead, elections have significant economic impacts. These contracts are designed to serve a critical risk-hedging function, comply with the Commodity Exchange Act (CEA), and provide valuable predictive data to the public."

Dragonfly participated in Polymarket's $45 million Series B financing in May this year.

Gemini founder Winklevoss believes that unlike polls, expert opinions, or expert advice, prediction markets require participants to put their money where their mouth is—there are stakes involved. "Decentralized prediction markets are a significant innovation with real public utility."

Coinbase's Chief Legal Officer Paul Grewal stated, "The proposal fails to recognize the public interest of prediction markets."

For stakeholders in prediction platforms, after multiple severe crackdowns by the CFTC on past prediction markets, the confidence to openly oppose the CFTC may stem from the overturning of the Chevron doctrine by the U.S. Supreme Court at the end of June, which had been in place for 40 years.

The Chevron doctrine allowed federal agencies to enforce regulations based on their own interpretations of sometimes ambiguous laws. With its overturning, the authority of agencies like the CFTC will be weakened.

Dragonfly's legal team also mentioned that after the Supreme Court overturned the Chevron doctrine, the CFTC must ensure it has the authority to regulate these contracts.

Coinbase also stated that the CFTC's definition of gambling is too vague. Crypto.com Senior Vice President Steve Humenik remarked that the CFTC "is neither a gambling regulator nor an election regulator and is not qualified to regulate this market."

The overturning of the Chevron doctrine poses significant challenges to the CFTC's regulatory authority.

Polymarket's Long-term Concerns and Immediate Worries

According to Similarweb data, before reaching a settlement with the CFTC, the U.S. traffic share was between 34% and 54%.

After settling with the CFTC in 2022, Polymarket announced its exit from the U.S. market. However, currently, 25% of Polymarket's website visitors still come from the U.S.

A recent Forbes article investigating Polymarket reported that founder Coplan did not comment on the platform's geographic blocking measures.

This year, due to increased trading volumes from U.S. election events and the Olympics, Polymarket's cumulative trading volume has surpassed $1 billion. Among this, the trading volume from July 1 to 30 alone exceeded $300 million.

The vast majority of trading volume on Polymarket comes from U.S. election-related predictions, with the prize pool for predicting the winner of the 2024 U.S. presidential election reaching as high as $600 million.

Similar to InTrade, which became popular during the 2012 election year, Polymarket has also become a source cited by several professional media outlets like Bloomberg for election predictions.

The CFTC's proposed rules to ban contracts related to election predictions are hard to say are not aimed at Polymarket.

Aside from the U.S., Polymarket essentially offers binary options products, which are subject to strict regulation in most parts of the world.

In addition to regulatory issues, Polymarket also faces concerns about whether its popularity is sustainable and pressure from competitors.

Currently, Polymarket only has significant traffic in short-term topics of interest to the crypto industry, such as the U.S. elections.

Although the trading volume in Polymarket's non-election markets is continuously growing, it still receives relatively low attention. As the 2024 U.S. presidential election concludes at the end of the year, how Polymarket will maintain its trading volume remains uncertain.

Polymarket supporter Bhargava from General Catalyst is not worried, believing that aside from elections, significant events will always occur, especially in an increasingly turbulent world.

Recently, Polymarket has also been expanding its channels and improving prediction accuracy to enhance its content generation capabilities and coverage.

On July 30, Polymarket's prediction market was integrated with the well-known content subscription platform Substack. On August 13, Polymarket announced a partnership with the AI-driven search engine Perplexity to provide users with real-time news summaries of events.

In terms of competitors, the Web3 data platform RootData has already included over 50 crypto prediction market projects.

According to data analysis by analyst Mikey from 1kx, if sports markets are included, the overall trading volume from the beginning of the year shows that Azuro and SX Network's trading volumes are closer to Polymarket's.

Some potential competitors are emerging, such as Limitless Exchange running on EVM, Hedgehog Markets in the Solana ecosystem, and several prediction platforms still in development, including Drift Exchange, xMarkets, Inertia Social, Doxa, and Contro.

Image source: Analyst Mikey from 1kx

Recently, the Solana ecosystem governance project MetaDAO, which can be used for prediction markets, also received investment from Paradigm.

Competitors in the traditional financial sector cannot be overlooked either. In April, billionaire Jeff Yass's trading firm Susquehanna International established an independent department to attempt to build a market on Kalshi, a competitor to Polymarket.