Canadian Regulator bets against Polymarket with settlement of enforcement proceedings...

Another day, another crypto enforcement proceeding comes to an end. A combination of shifting policy winds ending regulation by enforcement and crypto businesses seeking to engage with regulators and offer compliant products or just the wheels of Canadian justice moving forward?

The Ontario Securities Commission (OSC) initiated an enforcement proceeding against two US companies operating the popular Polymarket prediction service.  The companies, Blockratize Inc. and Adventure One QSS Inc. were accused of operating an unlicensed global options trading platform that violated Ontario securities regulations by offering binary options (i.e. bets on the outcomes of events) to Ontario residents between June 2020 and May 2023.

Polymarket connected users with smart contract wallet addresses on the Polygon blockchain to place bets against each other using USDC with contract resolution initially managed by Polymarket’s Markets Integrity Committee and later by the UMA Optimistic Oracle, a decentralised oracle designed to record and verify data on a blockchain.

Polymarket’s platform made heavy use of advertising like “bet on your beliefs” gives a gambling vibe to the site and event-based options trading on topics ranging from politics and sports to cryptocurrency and pop culture have been viewed by regulators as financial products, if not gambling products.

Canada bans binary options under Multilateral Instrument 91-102 unless narrow and specific exemptions are met. Australia has imposed a similar ban until 2031. Despite regulatory concerns, proponents continue to advance the financial and social utility of prediction markets.

The OSC’s case relied on three key violations:

• Offering binary options in Ontario without appropriate regulatory exemptions

• Providing a trading platform accessible to Ontario residents through blockchain technology

• Engaging in solicitation activities that encouraged speculative trading, including features like a leaderboard displaying top traders and automatic social media trade sharing

This enforcement action aligns with broader international regulatory efforts to provide oversight in the rapidly evolving cryptocurrency and blockchain trading landscape, signaling scrutiny of decentralized financial platforms that potentially expose investors to unregulated financial risks, while some jurisdictions, like Canada, do not provide a pathway for a compliant offering of those products as yet.

During the “Material Time”, the OSC says Polymarket offered over 6,044 event-based contracts with approximately $254 million in trading volume, with substantial engagement from Ontario residents, but notably Polymarket only derived approximately $23,000 in revenue from the breaches.

Significantly, the US Commodity Futures Trading Commission (CFTC) had previously sanctioned Polymarkets in January 2022, ordering cessation of much of their activities in the USA and Polymarket paid a US$1.4M penalty. Later the founder's house was raided by the FBI over allegations Polymarket was still serving US customers. France also shut down Polymarket's access to that market.

Critically, Polymarket did not engage in discussions with the OSC but instead put geoblock restrictions on Canadian residents in mid-2023, prohibiting Ontario residents from purchasing new options while allowing existing positions to close out. The OSC has asked for Court approval of a settlement with Polymarket, the details of which are not yet known.

Takeaway

This action shows simply geoblocking a country in response to a regulator's concerns is not likely to lead to a happy ending, projects should ensure they get sensible advice and engage with regulators to explore if compliance is possible (in many countries it may not be) prior to launch. Meanwhile, the debate over the utility and risks of prediction markets as an investment and predictive tool looks set to rage on.

By Michael Bacina and Steven Pettigrove