Polymarket likely to remain offshore for now despite ruling in favor of US election betting

Despite its popularity — including a trading volume of nearly $500 million in August — Polymarket does not operate in the U.S. due to regulatory scrutiny from the Commodity Futures Trading Commission, the agency that oversees derivatives markets.

On Friday, however, a federal judge in Washington, DC, restricted the CFTC’s power to restrict election betting markets, siding with another prediction market called Kalshi, which argued that the agency could not prevent them from letting American customers bet on which party each will win. The House of Congress at the elections.

While it’s not yet clear how the Polymarket decision will affect — Judge Jia Cobb has yet to publish the full reasoning beyond Friday’s one-page order — the ruling could open the way for U.S. election betting markets and hinder the CFTC’s ability to regulate the companies behind them.

Bet on the future

Americans have long been obsessed with the statistical probability of election outcomes, with platforms like Nate Silver’s FiveThirtyEight and the infamous New York Times the poll goes viral before every presidential election.

But prediction markets such as Kalshi and Polymarket – which allow users to bet on outcomes based on specified odds, similar to sports gambling – have become increasingly popular, with some analysts arguing that the “wisdom of the masses” nature of the markets more wide, along with the variable addition of money, creates safer odds. Silver even joined Polymarket as an advisor in July.

Regardless of whether platforms like Polymarket offer better predictions than survey averages, the wrinkle in gambling places them in a regulatory gray area. Under the Commodity Exchange Act, which established the CFTC’s oversight railings, the agency is allowed to prohibit certain types of event contracts, such as those involving war, gambling or a “similar activity” that is “contrary to the interest public”.

After Kalshi tried in June 2023 to list contracts for which political party would control the House and Senate, the CFTC blocked the new product, arguing that political gambling could violate state gambling laws and amount to with “gambling”. Kalshi sued the CFTC in November. The CFTC later proposed a new rule that would ban contracts for election events, with Chairman Rostin Behnam arguing that such bets would put the agency “in the role of an election policeman.”

Friday’s ruling, which comes less than a year after the lawsuit, effectively lifts the CFTC’s ban on Kalshi offering bets on congressional races. Kalshi responded by announcing that it would make the contracts available this week, but the CFTC requested an emergency stay of the ruling before deciding whether to appeal the ruling.

“At a time when mistrust in elections is at an all-time high, even a brief listing of the plaintiff’s contracts … could harm the public’s perception of the integrity of the election and undermine confidence in the election,” CFTC lawyers wrote in a Friday’s motion.

Polymarket is watching and waiting

Despite Kalshi leading the big decision, the focus will be on Polymarket, which sets and pays bets using Ethereum-based smart contracts and has raised $70 million in venture funding. Polymarket ceased operations in the US after reaching a $1.2 million settlement with the CFTC in 2022 for failing to register with the agency.

While Kalshi’s trading volumes aren’t public, like Polymarket’s, they probably pale in comparison, with Bloomberg reporting that Kalshi traded around $10 million a month in April 2023, though Kalshi has since added the financial firm Susquehanna as a user.

As prediction markets, regulators and election players await the judge’s full decision, all eyes will be on Polymarket, which is based in New York but has yet to signal whether it will reopen its platform to US users . The biggest question is whether the ruling on congressional betting can extend to contracts based on the presidential election outcome, and whether Kalshi and his competitors can launch such products before the November election. Given the CFTC’s emergency motion, Cobb is likely to release its full opinion in the coming days.

Despite its size, Polymarket will still be at a disadvantage due to Kalshi’s established presence in the U.S. “Polymarket is not registered with the CFTC, so we don’t think it will have an immediate impact there,” said Cantrell Dumas, director of derivatives policy at the progressive think tank Better Markets Wealth. “But we fear this decision will open the door to other platforms seeking CFTC registration and approval to offer bets on US elections.”

Polymarket declined to comment for this story, but a person familiar with the company said the court ruling was unlikely to result in sites offering bets in the US on the presidential contest ahead of the election. The person added that the decision will make presidential election betting mainstream in the long run.

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