As gambling regulators and stakeholders in the U.S. grapple with the rules that govern prediction markets, one thing seems to have caused some extra confusion: the fact that there are two Polymarkets.
On Polymarket’s global exchange, a recently created account made $436,000 in profit from betting that Nicolas Maduro would be removed as president of Venezuela, shortly before he was captured by U.S. forces Jan. 3.
Given the nature of the operation to capture Maduro, it seems likely that the trades in question would have been considered misappropriation of information, and therefore illegal. Not all insider trading is against Commodity Futures Trading Commission (CFTC) rules.
The trades attracted plenty of attention, including from Nevada Rep. Dina Titus, who wrote a letter to Polymarket CEO Shayne Coplan asking a number of questions about the platform.
Titus noted that the suspicious-looking trades came after Polymarket acquired a license to operate in the U.S. in July.
While technically true, that is arguably misleading. The Maduro trades took place on Polymarket’s “global” exchange, which blocks U.S. IP addresses, and is not regulated by the CFTC. Polymarket also owns and operates a U.S. exchange, which currently offers a more limited set of markets focused on sports, and is invitation-only for now. Both use the Polymarket brand name.
The two entities sitting side-by-side is an unusual situation, and arguably one that is naturally going to cause confusion.
“A lot of people have conflated them,” notes David Aron, a regulatory and transactional derivatives attorney at Lowenstein Sandler LLP.
But is there any way that the CFTC, which regulates Polymarket US, can take action if the global Polymarket exchange allows activity that might violate its rules? The Maduro trades would be one instance in which that question is relevant, but it could also come up with regard to accusations of wash trading on the global platform, or activity that resembles cross-market manipulation.
In terms of dealing with the exchange itself, the answer is mostly no.
“[The U.S. exchange] would only be responsible for their own actions,” another lawyer with expertise in commodities futures regulation told InGame.
Aron points out that in theory the CFTC could attempt to tie Polymarket’s global actions to its U.S. exchange on “reputational risk” grounds, but in practice, he says that concept has never been used regularly outside of banking, and even within that sector it has fallen out of favor.
Looks bad, but Polymarket off the hook?
It’s not just that the U.S. exchange would be treated separately. The CFTC generally can’t do much about an offshore exchange unless it’s doing something that would require registration (such as allowing users with U.S. IP addresses to place trades).
Aron points out that the impact of the Maduro trades might be more about publicity than legal consequences.
“If this global exchange doesn’t have to register, then this stuff looks bad but they might be off the hook,” he says.
When it comes to enforcing commodities and securities law for actions that might take place on an offshore exchange, the key question is whether the activity has a “U.S. nexus”
So what exactly counts as a U.S. nexus?
The Dodd-Frank Act laid out ways in which the CFTC’s governance of swaps can extend outside of the U.S., in a provision written shortly after a Supreme Court case in which the court ruled the Securities and Exchange Commission’s abilities to act extraterritorially were limited.
The law says that the CFTC can act abroad if the activities in question have a “direct and significant connection” with activities about U.S. commerce, or have an effect on U.S. commerce.
The clearest example of a U.S. nexus is if trades are made by a U.S. person. In this case, there is little doubt that the CFTC would still have jurisdiction.
“Having U.S. people trading gives the CFTC jurisdiction,” Aron notes. “Prior CFTCs did go after this sort of thing.”
However, that would only be enough for the CFTC to take action about the individual trader.
“The conduct could be relevant if the CFTC has jurisdiction over the conduct, even if not the exchange itself,” Aron says.
It’s harder to see how the CFTC could have jurisdiction over Polymarket itself – even though the overall business has a clear U.S. presence – when it comes to trades made on its global platform, unless it determined that the global exchange knowingly facilitated U.S. trading.
CFTC could change stance
But the truth is that there’s a certain amount of flexibility in what it means to knowingly facilitate U.S. trading. Barely over a year ago, Polymarket blocking U.S. IP addresses from trading was not enough for it to avoid a Department of Justice investigation, which focused on whether U.S. customers were still trading on the platform using VPNs. Under a new administration, authorities have taken a different stance, and dropped the 2024 investigation — a move that cleared a course for Polymarket to buy its way to designated contract market (DCM) status — in July.
In theory, though it does not appear to be on the horizon, the CFTC could simply change its stance on whether IP blocking the U.S. is sufficient.
“It’s a policy choice of what sorts of controls they view as reasonable to protect against U.S. traders trading on the platform,” the lawyer said. “At one point IP blocking was not sufficient, but now it is.”
In that world, the U.S. site would be at risk, but that’s a very blunt tool. If the CFTC wished only to ensure Polymarket attempted to stamp out activity that may violate its own rules, it would have little in the way of options to do so.
There is perhaps another clear way in which many trades on Polymarket’s global site appear to affect the U.S.
With CFTC-registered exchanges like Kalshi offering many of the same markets as Polymarket – or markets with only slight differences – a dramatic price change on Polymarket is likely to be reflected on Kalshi soon enough, as users seek arbitrage opportunities.
If the goal was to manipulate the Kalshi price, that would likely be a direct and significant connection. But if the movement on Kalshi was simply a byproduct of a Polymarket trade, even if that trade may have involved something that would be against CFTC rules, the link is likely not direct or significant.
But once again, if a direct link to the U.S. was established, that might mean consequences for individual traders, but it doesn’t necessarily mean Polymarket would be treated as if it is responsible.
“If there’s a bad actor trading on Polymarket, the bad actor would be on the hook,” Aron says.
