The Commodity Futures Trading Commission entered an order filing and simultaneously settling charges against Delaware-registered Blockratize doing business as Polymarket, based in New York City, for offering off-exchange event-based binary options contracts and failure to obtain designation as a designated contract market (DCM) or registration as a swap execution facility (SEF).
The order requires that Polymarket pay a $1.4 million civil monetary penalty, facilitate the resolution (i.e. wind down) of all markets displayed on Polymarket.com that do not comply with the Commodity Exchange Act (CEA) and applicable CFTC regulations, and cease and desist from violating the CEA and CFTC regulations, as charged.
“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,” said acting director of Enforcement Vincent McGonagle, in a stateement. “Market participants should proactively engage with the CFTC to ensure that our markets remain robust, transparent, and afford customers the protection provided under the CEA and our regulations.”
Polymarket describes its activities as displaying “existing markets live on the Ethereum blockchain (or sidechains) and is a graphical user interface for both visualizing data and market trends from on-chain activity, and interacting with said smart contracts directly via your Web 3 enabled wallet.”
Commenting on the enforcement action in an emailed statement, David Carlisle, head of Policy & Regulatory Affairs at blockchain analytics firm Elliptic said:
“CTFC’s action shows that many DeFi platforms exercise some measure of control over user activities and can therefore be held accountable by regulators, despite claiming to be fully decentralized and outside the scope of regulation. Recent guidance from the Financial Action Task Force means that regulators in Europe and Asia will also be turning attention to regulating the DeFi space so we can expect these platforms to face increased scrutiny globally.”
“By announcing an enforcement action against a DeFi market on the first working day of 2022, the CFTC is sending a powerful message: US regulators will not tolerate DeFi becoming a haven for regulatory arbitrage. DeFi innovators should expect that the CFTC and other US regulators will significantly ramp up scrutiny in 2022, and more enforcement actions are certainly on the way this year.”
“DeFi projects can front-run additional regulatory scrutiny and avoid adverse consequences by proactively ensuring compliance arrangements are built into DeFi apps as they are launched. While some DeFi platforms may try to avoid servicing the US market to avoid regulatory scrutiny, hiding offshore is unlikely to be a sustainable strategy.”