Polymarket likely to remain abroad for the time being despite ruling in favor of US election betting

Despite its popularity – including nearly $500 million in trading volume in August – Polymarket is not active in the US because it is closely monitored by the Commodity Futures Trading Commission, the agency that oversees derivatives markets.

On Friday, however, a federal judge in Washington, DC, limited the CFTC's power to restrict election betting markets, siding with another prediction market called Kalshi. Kalshi claimed the agency could not prohibit him from letting U.S. customers place bets on which party would win elections in each chamber of Congress.

It is still unclear what impact the ruling will have on Polymarket – Judge Jia Cobb has not yet released her full reasoning beyond Friday's unilateral order – but the decision could pave the way for election betting markets in the US and deprive the CFTC of the ability to regulate the companies behind them.

Betting 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 Before every presidential election, poll results go viral.

But prediction markets like Kalshi and Polymarket – which allow users to bet on outcomes at set odds, similar to sports betting – are growing in popularity. Some analysts argue that the “wisdom of the crowds” of broader markets, along with the added variable of money, leads to more reliable odds. Silver even joined Polymarket as a consultant in July.

Regardless of whether platforms like Polymarket provide better predictions than survey averages, the specific nature of gambling puts them in a regulatory gray area. Under the Commodity Exchange Act, which sets the CFTC's oversight rules, the agency can prohibit certain types of event contracts, such as those involving war, gambling or any “similar activity” that is “contrary to the public interest.”

When Kalshi attempted to list contracts in June 2023 that would give political parties control of the House and Senate, the CFTC blocked the new product on the grounds that political gambling could violate state gambling laws and be considered “gambling.” Kalshi sued the CFTC in November of that year. The CFTC later proposed a new rule that would ban election rally contracts, with Chairman Rostin Behnam arguing that such wagering would put the agency “in the role of election cop.”

Friday's ruling, issued less than a year after the lawsuit, lifts the CFTC's ban on Kalshi offering bets on congressional elections. Kalshi responded by announcing it would make the contracts available later this week, but the CFTC has requested a temporary stay of the decision before it can decide whether to appeal the ruling.

“At a time when distrust in elections is at an all-time high, even a brief listing of Plaintiff's contracts … could damage public perceptions of election integrity and undermine confidence in elections,” CFTC lawyers wrote in a filing Friday.

Polymarket observes and waits

Although Kalshi pushed for the momentous decision, the spotlight will be on Polymarket, which settles and pays out bets using Ethereum-based smart contracts and has raised $70 million in venture capital. Polymarket ceased operations in the U.S. after reaching a $1.2 million settlement with the CFTC in 2022 for failing to register with the agency.

While Kalshi's trading volume is not publicly available, unlike Polymarket's, it likely pales in comparison: Bloomberg reported that Kalshi was trading about $10 million per month as of April 2023, although Kalshi has since added financial firm Susquehanna as a user.

As prediction markets, regulators and election bettors await the judge's final decision, all eyes will be on Polymarket, which is based in New York but has not yet signaled whether it will reopen its platform to U.S. users. The biggest question is whether the ruling on congressional betting can be extended to contracts based on the outcome of the presidential election – and whether Kalshi and its competitors can launch such products before the November election. Given the CFTC's emergency motion, Cobb will likely release her 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 there will be an immediate impact there,” said Cantrell Dumas, director of derivatives policy at progressive think tank Better Markets. Assets. “However, we fear that this ruling will open the door to other platforms seeking CFTC registration and approval to offer betting on U.S. elections.”

Polymarket declined to comment for this article, but a person familiar with the company said it was unlikely the court ruling would lead to websites in the U.S. offering betting on the presidential race ahead of the election. The person added that the ruling would make presidential election betting mainstream in the long term.