All or Nothing: Examining the Canadian Ban on Prediction Market Platforms

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by

Asad Akhtar
in , ,

With the announcement in April that certain CIRO[1] dealer members have received regulatory approval to offer event contracts,[2] there has been a consistent stream of public commentary regarding the permissibility of prediction markets for retail Canadian clients.

Much of this commentary has been focused on potential consumer protection concerns while others have argued for the potential benefits prediction markets may provide (e.g., more efficient price discovery, aggregation of information, hedging events that are not otherwise captured by existing financial instruments, etc.). This article is not intended to wade into these ongoing debates.

Rather, this article is intended to provide a deeper dive into the existing regulatory framework for prediction market platforms under Canadian securities legislation and the rule which has been acting as the primary floodgate – Multilateral Instrument 91-102 Prohibition of Binary Options (the “Binary Options Ban”).[3] Since it came into force in late 2017, the Binary Options Ban served as an incredibly simple and effective tool in stopping the inflow of fraudulent offshore platforms from targeting Canadian investors.

However, the rapidly emerging framework for prediction markets in the U.S. along with the considerable change in the landscape (i.e., legitimate and regulated platform operators) does raise the question as to whether the CSA should continue to maintain such a binary approach towards prediction markets.  As has been seen with other emerging products (e.g., crypto assets), there is an opportunity for the CSA to create a bespoke regulatory framework that strikes an appropriate balance between fostering innovation in the Canadian capital markets with investor protection.

As a level setting exercise, it is important to place the CIRO regulatory approvals in context. The proposed event contracts to be made available by CIRO dealers are a substantially limited subset of the vast ecosystem of products that are available for trading by prediction markets south of the border that are regulated by the U.S. Commodity Futures Trading Commission (“CFTC”).

1. CIRO Approvals – A Traditional Event Contract?

Pursuant to the terms and conditions placed by CIRO (in consultation with the CSA),[4] the offering of event contracts by CIRO dealers will be subject to the following restrictions:

  • Limited Subset– Permitted event contracts are strictly limited to the following three categories: (1) economic forecasts, (2) environment forecasts, and (3) financial indicators. These event contracts must also be traded and cleared by certain CFTC regulated entities.
  • Maturity Greater than 30 days – Event contracts must have a term of maturity of 30 days or longer. This restriction allows CIRO dealers to rely upon a codified carve out in the Binary Options Ban.[5] While this restriction is a carry-over from the Binary Options Ban, it is not clear how the CSA ultimately arrived at a term of 30 days for the Binary Options Ban.
  • No Political Events – One of the longstanding use cases for prediction markets, including platforms that received no-action relief from the CFTC decades ago, has been to predict the outcome of political events.[6] However, CIRO dealers are specifically excluded from offering event contracts based on the outcome of elections, political events, or “other events of a political nature”.
  • No Leverage – Consistent with the CSA’s position for other novel financial products (e.g., crypto assets), CIRO dealers are restricted from offering leverage or margin accounts for event contracts.
  • Unlawful Activities – The underlying interest of an event contract cannot relate to an unlawful activity. This restriction is not at all surprising and a similar prohibition applies to CFTC regulated platforms for event contracts relating to terrorism, assassination, war and gaming under Rule 40.11 of the Commodity Exchange Act.

2. The Binary Options Ban

The Binary Options Ban came into effect in most Canadian jurisdictions on December 12, 2017, at a record setting pace of eights months from the date the rule was first published for comments.  In contrast to most other securities law rules, the Binary Options Ban is straightforward and, in its entirety, is only five sections long.  While brief in length, the Binary Options Ban is quite broad in application:

  • Definition of a Binary Option – A binary option is defined as a contract or instrument that provides for only: (a) a predetermined fixed amount if the underlying interest referenced in the contract meets one or more predetermined conditions; and (b) zero or another predetermined fixed amount.
  • Trading Prohibition – The Binary Options Ban prohibits the advertising, offering, selling or otherwise “trade”[7] of a binary option with a retail investor.

This overly broad drafting is not by accident. Rather, it has served as an integral part of the reason why the Binary Options Ban has been an incredibly effectively regulatory tool.

A primary goal of the Binary Options Ban has been to address the substantial number of complaints received relating to offshore platforms that, in many instances, were purely fraudulent with no actual trading activity taking place.

Disrupting Fraudulent Off-Shore Platforms

By scoping in the various legitimate intermediaries that may be involved with these platforms (e.g., payment processors, social media platforms, advertisers), the CSA has effectively been able to disrupt the reach of these platforms to Canadians without needing to expend regulatory resources in targeting offshore platforms.

Not Expanding Regulatory Scope

The CSA has been clear in stating that, irrespective of the Binary Options Ban, binary options are securities and/or derivatives that are already captured under existing Canadian securities legislation. In practice however the Binary Options Ban has served as an easily digestible legal rule that clearly identifies the CSA’s jurisdiction to global technology providers and payment processors.

3. Future Outlook on Prediction Markets in Canada

The Binary Options Ban is a great example of the CSA acting promptly and in a unique matter (i.e., focusing on disruption through intermediaries) to successfully address an emerging threat to Canadian investors.

However, it should be acknowledged how vastly different the landscape was for prediction markets in 2017. At that time, the Binary Options Ban was intended to protect would-be investors from becoming victims of offshore platforms that promised quick and high yield returns. In many instances, there was never actually any trading activity that took place and the platforms were purely fraudulent.

In stark contrast, the dominant prediction market platforms today are legitimate U.S. entities regulated by the CFTC. The CFTC has been working at a record pace in developing a comprehensive regulatory framework for prediction markets and taking enforcement action against bad actors (e.g., insider trading in the prediction markets has been identified by the CFTC as a top priority for enforcement action).

The failure by the CSA to consider a new approach towards the Binary Options Ban for appropriately registered firms may result in Canadian investors seeking out unregulated foreign platforms where there may be limited, if any, investor protections. As has been seen with the development of the regulatory framework for crypto asset trading platforms, the CSA has a unique opportunity to strike a balance between facilitating innovation in the Canadian capital markets with investor protection.

[1] Canadian Investment Regulatory Organization (“CIRO”) is the self-regulatory organization responsible for regulating investment dealers and mutual fund dealers in Canada.

[2] https://www.ciro.ca/newsroom/publications/application-ciro-requirements-event-contracts#appendixA

[3] British Columbia has not adopted the Binary Options Ban. However, the BCSC published BC Notice 2017/02 which identifies many of the risks relating to binary options and also states that such products cannot be legally advertised, offered, sold or otherwise traded to retail investors in BC.

[5] Section 4 of the Binary Options Ban excludes event contracts with a term to maturity of 30 days or longer from the trading prohibition.

[6] The CFTC’s proposed new rules for event contracts, published on June 10 2026, specifically exclude election outcomes from the definition of “gaming” that would otherwise be subject to an inquiry to determine whether they are contrary to the public interest.

[7] In Ontario, a “trade” is broadly interpreted to include any “act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of a trade”.