The Commodity Futures Trading Commission (“CFTC” or “Commission”) sanctioned Blockratize, Inc. d/b/a Polymarket.com on January 3, 2022 and ordered it to pay a $1.4 million civil money penalty for violations of the Commodity Exchange Act (“Act”), United States Code, and Commission Regulations (“Regulations”) in its operation of an unregistered facility or non-designated contract market by offering and facilitating online trading of event-based binary options contracts known as “event markets.” Binary options contracts are financial products that have only two payoff options if the contract is held until expiration: 

1. If the underlying reference asset is above a certain price at a certain time, the holder receives a fixed amount; or 
2. If the underlying reference asset is below a certain price at a certain time, the holder receives nothing.  

Via its website, Blockratize offered the public an opportunity to “buy their belief” by buying and selling binary options contracts related to some future event. The Commission held that these contracts derived from external events constitute swaps under the CFTC’s jurisdiction, which can only be offered on a registered exchange.

In recent years, the world has seen an increase of FinTech crossing into the world of online gaming and gambling. Much of the legal and regulatory framework has not always been so clear where the lines are drawn between permissible and impermissible platforms and offerings in this space. As shown in the Blockratize matter, the CFTC has demonstrated that it is prepared to apply existing rules and regulations to activities within in its purview to establish jurisdiction over, and impose sanctions upon, companies hosting online gambling and trading facilities that offer the trading of swaps. 

Developers and venturers, when bringing products to market that merge the concepts of gamification and electronic trading, should: 

1. Be diligent in how they structure their platform, games and online trading venues; 
2. Recognize and take note of potential pitfalls to mitigate legal and regulatory risk and any resulting liability, and; 
3. Consult legal counsel well-versed in the industry, standard practices, and the applicable regulatory environment.

Read the order here.