Is Polymarket Trading Considered Gambling Under Criminal Law?

"Lawyer, if I predict election or sports results on Polymarket and buy specific positions with digital assets, does that constitute gambling?"

The Broadcasting and Communications Review Committee (BCRC) decided on the 18th of last month to block access to Polymarket, an overseas prediction market platform, in South Korea. In fact, access to Polymarket has recently been blocked in the country.

Before making this decision, the BCRC heard opinions from Polymarket, but concluded that "the winner-takes-all profit structure of Polymarket encourages gambling, and it cannot evade the application of domestic laws due to technical characteristics such as decentralization." Therefore, it was determined that Polymarket still falls under the criminal law's definition of establishing a gambling house or aiding gambling, as well as violating the National Sports Promotion Act (prohibition of similar acts).

Recently, the police have been investigating domestic users of Polymarket under the criminal law's gambling provisions.

So, does the use of Polymarket's prediction market by domestic users constitute gambling under criminal law?

First, Polymarket is a service platform where users can buy specific positions with digital assets, typically betting on the outcome of events such as sports, politics, crypto, geopolitics, culture, and weather, with options like "Yes" or "No" or positions A or B. Once the outcome is confirmed, the winning position receives a predetermined reward. On Polymarket, transactions are usually conducted using digital assets like the stablecoin USDC.

Meanwhile, the gambling crime defined in Article 246 of the Criminal Law refers to betting on the outcome of an event based on chance. Although the law distinguishes between property and 'economic benefits', case law consistently includes 'economic benefits' within the definition of property in gambling crimes.

The relevant provision does not limit the object of gambling to only visible or tangible 'property'. Additionally, 'chance' in gambling crimes refers to determining the outcome based on facts that the parties cannot foresee or freely control. Even if a party's ability influences the outcome, if the outcome is affected by chance, a gambling crime can be established.

Thus, even in betting golf, where skill is often thought to determine the outcome, a gambling crime can be established (refer to Supreme Court ruling 2008.10.23, case number 2006do736). Case law broadly interprets the concept of 'chance' in gambling crimes.

Applying this to Polymarket, the prediction targets on Polymarket, such as "when the U.S. acknowledges the existence of aliens" or "the date Elon Musk posts on Twitter", rely more on chance than specific sports results, and users can be said to be betting their digital assets on such outcomes.

Therefore, the predictive actions on Polymarket are likely to meet the criteria for gambling crimes under criminal law.

However, not all uses of Polymarket necessarily constitute gambling crimes. As stated in the exception of Article 246, "However, in cases where it is merely a matter of minor gambling, exceptions apply," if the scale or frequency is small, a gambling crime may not be established.

In other words, actions that do not violate laws or social norms may not be considered illegal, and thus a gambling crime may not be established.

Furthermore, the services provided by Polymarket are structurally similar to 'derivatives' under the Capital Markets and Financial Investment Business Act (Capital Markets Act). In fact, discussions are already underway in the U.S. regarding treating prediction market products as event contracts and effectively as derivatives. If Polymarket's prediction products are deemed derivatives under the Capital Markets Act, trading them could be evaluated as a legally permitted act.

First, derivatives under the Capital Markets Act refer to contracts that promise to deliver money calculated based on 'underlying assets' or their prices, interest rates, indicators, units, or indices at a specific future point in time. These are commonly known as futures, options, and swaps.

Here, underlying assets can include agricultural products, livestock, and fishery products, as well as risks related to other natural, environmental, and economic phenomena that can be reasonably and appropriately assessed or evaluated for price, interest rates, or indicators (Article 4, Paragraph 10 of the Capital Markets Act).

Thus, there is a possibility that some of Polymarket's prediction targets, such as gold, silver, S&P 500, exchange rates, and weather, could be evaluated as underlying assets, raising the question of whether they can be considered derivatives. However, it is essential to carefully examine whether these targets qualify as derivatives under the Capital Markets Act.

The Supreme Court has ruled that "the transaction where the customer pays 100,000 won to the defendant and is granted the right to receive profits based on fluctuations in the exchange rate of the British pound and Australian dollar is merely a game or gambling, and cannot be considered a derivative under the former Capital Markets Act." It also stated that "whether a transaction falls under the regulation of financial investment products in the former Capital Markets Act should be carefully considered, particularly whether it can serve a positive function in avoiding or diversifying various risks associated with economic activities, especially if it is a highly speculative transaction, and whether appropriate regulatory measures are in place to protect investors' interests and maintain sound trading order" (refer to Supreme Court ruling 2015.9.10, case number 2012do9660).

Ultimately, while some prediction targets on Polymarket may resemble derivatives, most are likely to be assessed as speculative transactions far removed from risk-hedging functions, and the compensation for specific position purchases is also formed based on supply and demand among participants, making it difficult to evaluate as 'money calculated based on the price or index of underlying assets'. Therefore, specific position purchases on Polymarket are likely to be assessed as gambling under criminal law.

Of course, the Polymarket prediction market itself can serve as a guide to understanding public sentiment and predicting future situations, which is undoubtedly a positive function. However, in South Korea, it is still highly likely to be evaluated as gambling under the legal system.

However, as mentioned earlier, considering the frequency and scale of using Polymarket and all relevant circumstances, it should be comprehensively evaluated whether it falls under minor gambling or whether it can be assessed as trading derivatives based on the prediction targets when determining the establishment of gambling crimes.

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