(Bloomberg) -- A top financial regulator is closely monitoring offshore, unregulated companies that allow Americans to trade on US election outcomes.
“We are observing any activity that’s occurring offshore and providing exposure to US customers,” Rostin Behnam, chairman of the US Commodity Futures Trading Commission, said Tuesday at a conference hosted by Georgetown University’s Psaros Center for Financial Markets and Policy.
Behnam was asked what the agency intended to do about Polymarket, a crypto-betting platform with about $1 billion in trading volume tied to dozens of US election outcomes. “If anyone, Polymarket or otherwise, conducts themselves in a way that breaks the law, we will use our civil enforcement authority to make sure that conduct stops,” Behnam said.
Polymarket’s financial products are structured as derivatives contracts that fall under the CFTC’s jurisdiction.
A Polymarket representative didn’t immediately respond to an emailed request for comment.
In 2022, CFTC brought an enforcement action and a $1.4 million settlement with Polymarket for failing to register with the commission and offering trading to US-based customers.
New York-based Polymarket agreed to block its platform from US traders, but American users have said they continued to trade on the popular platform, Bloomberg reported in August.
Polymarket was unique in that it only offered trading using digital assets. But another company has decided to join its ranks. Wintermute Trading Ltd. announced Tuesday that it plans to launch a crypto-based competitor to Polymarket and allow traders to wager on the US presidential election using so-called smart contracts.
The CFTC has been grappling with how to regulate the burgeoning market for trading politics-themed derivatives. In May, it introduced a proposed rule to block them altogether.
The agency is waging a court battle against Kalshi Inc., a regulated event contracts exchange that allows traders to stake money on everything from the weather to Federal Reserve interest-rate movements. It’s fighting another one with PredictIt, a long-running elections trading platform that operated under a CFTC authorization that didn’t require it to register until the agency revoked the measure in 2022.
At Tuesday’s conference, Behnam said the proliferation of elections-based event contracts on CFTC-registered exchanges risks will force the regulator to become an elections cop if there are allegations of fraud or manipulation in their trading.
Supporters of political prediction markets say the price discovery and near-instant trading opportunity off of news and analysis produce better predictions compared with traditional elections polls.
But the speed of news and misinformation about a candidate or a political race could easily affect pricing on the contracts tied to them, Behnam said. The CFTC could be pulled into investigating any allegations of price manipulation, he said.
“I just don’t think that Congress or the general public wants a federal financial regulator policing elections,” he said. Behnam said the asset class would be better regulated at the state level as a form of gambling.
--With assistance from Sridhar Natarajan.
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