Are Prediction Markets Casinos?
Special Disclaimer: This article is an original work by Attorney Shao Shiwei. It reflects only the personal views of the author and does not constitute legal advice or a legal opinion on any specific matter. For article reprints, legal consultations, or business exchanges, please add: sswls66
On June 28, 2024, the first televised presidential debate between Biden and Trump drew global attention. During the same period, participation in U.S. presidential election predictions surged on Polymarket, a globally renowned crypto prediction market platform strongly promoted by Vitalik Buterin. Platform data for June showed that Trump’s probability of winning the election was 62%, while Biden’s probability of victory was 23%.
Just two days ago, on July 13 (local time), a shooting incident occurred at a campaign rally held by Trump in Butler, Pennsylvania. A 20-year-old man fired up to eight shots from an AR-style rifle, one of which grazed past Trump’s ear. Following this assassination attempt, Trump’s probability of winning on Polymarket rose to 71%.
As a political figure adept at leveraging social media, Trump had previously reposted his odds on Polymarket several times on Truth Social, the media platform he founded. This not only served his image management but also brought significant exposure to the platform.
However, are such crypto prediction market platforms compliant? This question remains open to debate.
Author of this article | Attorney Shao Shiwei
01
What Is a Crypto Prediction Market?
A crypto prediction market is a decentralized DeFi protocol that allows anyone to trade the outcomes of events on smart contracts when certain conditions are met. Simply put, it enables users to bet on the outcomes of various real-world events using stablecoins. If the prediction is correct, the user gains profits; if incorrect, the user loses the amount wagered.
The first blockchain-based decentralized prediction market was Augur, launched on Ethereum in 2018. Vitalik Buterin, the founder of Ethereum, served as an advisor to its development company.Perhaps this is one of the reasons why Vitalik Buterin has recently been strongly promoting prediction platforms?
Currently, Polymarket is one of the largest prediction market platforms in the world. Notably, the betting period for the “Winner of the 2024 Presidential Election” market on the platform ends on November 5, 2024. To illustrate the platform’s popularity: as of July 16, nearly USD 261 million had been wagered on predicting the outcome of the U.S. presidential election.
Of course, there are other major platforms currently operating in the prediction market space, including Gnosis, Azuro, Hedgehog, PlotX, and SX. It is fair to say that users have a wide array of choices.
02
Operational Mechanics of Crypto Prediction Platforms
The primary mechanism employed by such platforms is the binary prediction market, wherein users place bets to make predictions.
Taking the prediction of the winner of the 2024 U.S. presidential election as an example, if a user believes that the probability of Trump’s victory exceeds 71%, they would purchase “Yes” shares at a price of 71 cents per share. If Trump is indeed elected President of the United States, each “Yes” share will be worth $1. The profit per share would amount to 29 cents. Conversely, any user holding “No” shares would lose the entire value of their holdings.
In essence, crypto prediction market platforms offer products akin to binary options. Users are presented with two possible outcomes for the predicted event—“Yes” or “No”—and these choices constitute the option products acquired by the users.
03
Compliance Analysis of Crypto Prediction Market Platforms
Some may question whether this model closely resembles gambling platforms, albeit with fewer variations in gameplay. In fact, most jurisdictions worldwide have not provided explicit definitions for binary option-type products; however, regulatory authorities across these jurisdictions have generally adopted a strict and prudent stance.
1. Regulatory Stances Across Jurisdictions
United States
Over-the-counter binary options are strictly prohibited. Currently, only two regulated exchanges are permitted to offer binary options trading: NADEX and Cantor. In 2022, the U.S. Commodity Futures Trading Commission (CFTC) filed a lawsuit against Polymarket, alleging its failure to register as a Designated Contract Market (DCM) and Swap Execution Facility (SEF) under the Commodity Exchange Act (CEA). As a result, the platform paid a $1.4 million fine and committed to reducing its services within the United States.
United Kingdom
Previously, the UK government classified binary options as gambling activities, subjecting them to regulation by the Gambling Commission. However, this approach failed to provide effective regulatory oversight and investor protection for binary options. In 2015, the UK government began discussions on transferring regulatory authority over binary options from the Gambling Commission to the Financial Conduct Authority (FCA). This shift would formally reclassify binary options as financial instruments rather than gambling products.
China
In China, binary options are not lawful financial products.Guiding Case No. 146, published by the Supreme People's Court, titled 'Chen Qinghao and Others Suspected of Operating a Casino,' explicitly characterizes the operation of binary options websites as the crime of opening a casino. The court held that where defendants, under the guise of 'binary options' trading, solicit 'investors' via the internet outside statutory futures trading venues, use future price movements of foreign exchange products as the subject matter of transactions, determine profits and losses based on 'buying up' or 'buying down,' allow 'investors' who correctly predict the direction to profit, and retain the principal of those who predict incorrectly for the website (the dealer), with the outcome not linked to the actual magnitude of price fluctuations, the essence is 'betting on big or small, gambling on win or loss.' Such conduct constitutes gambling disguised as options trading, and the relevant websites should be recognized as gambling websites.
2. Implied Ethical Issues
Beyond regulatory concerns, prediction markets also involve ethical issues. For instance, open prediction questions on prediction markets have previously sparked user controversy. For example, a user on platform X asked, “Which stage of capitalism does betting on someone’s death belong to?” and posted a screenshot of odds from a prediction platform, triggering widespread criticism of the platform by numerous users.
Furthermore, prediction markets may carry risks of market manipulation, whereby participants with sufficient resources may influence market prediction outcomes through substantial capital injections, thereby harming the interests of other participants.
At the same time, prediction markets may promote speculative forecasting of event outcomes, which may sometimes diverge from actual circumstances, thereby facilitating the spread of misinformation. Particularly during major social events (such as epidemics), erroneous prediction outcomes may mislead the public and thereby affect social stability.
04
Conclusion
As blockchain-based prediction markets, crypto prediction markets leverage smart contracts to ensure fairness, transparency, and automated distribution of rewards. Compared with potential black-box operations in traditional online prediction platforms, user experience is likely to be improved. Moreover, because users must commit real funds to make predictions, such predictions may be significantly more accurate than surveys or expert deliberations. However, as noted above, the regulatory challenges and ethical issues associated with crypto prediction platforms pose severe challenges to their compliant development.
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