Wealthsimple is a step closer to offering prediction markets, experts say it is a ‘slippery slope’

As Wealthsimple marks a decade in operation, the financial platform is confirming for first time that it's profitable as it sees revenue and assets soar. The splash screen for the Wealthsimple app is seen on a smartphone in a photo illustration made in Toronto, Monday, June 17, 2024. THE CANADIAN PRESS/Giordano Ciampini

A Toronto-based fintech company has gained approval to offer forecast trading to its customers, effectively letting users wager on how select future events will unfold.

But experts are warning that the practice could lead to a “dangerous slippery slope” as it “blurs the line between investing and gambling.”

Wealthsimple confirmed they received regulatory approval from the Canadian Investment Regulatory Organization (CIRO) to offer “futures and forecast contracts tied to economic indicators, financial markets and economic trends.”

However, Wealthsimple said it has not announced any “product plans” at this time.

Prediction trading gives investors the ability to place a bet on real-world events, which is orchestrated through a “yes” or “no” contract.

“It is essentially as a contract which pays the owner of the contract a particular amount, usually $1 if a particular event occurs, and it pays zero if the event doesn’t occur,” Andreas Park, finance professor at the University of Toronto, said in an interview with CTV News Toronto Thursday.

Wealthsimple is the second company to receive this approval from CIRO, the pan-Canadian self-regulatory organization that oversees investment and mutual fund dealers, as well as trading activity.

The first company, Interactive Brokers Canada Inc. (IBKR), launched prediction markets in the country last April. Jean-Francois Bernier, the company’s managing director, said they have empowered Canadian investors to participate in real-time events that are “driving market dynamics.”

“As demand for outcome-based trading continues to grow, we’re pleased to provide Canadian investors with a simple and cost-effective way to position portfolios or hedge against major market-influencing events, such as upcoming Fed Decisions, Canada Consumer Price Index releases or daily high temperature forecasts in select U.S. cities through IBKR’s prediction markets,” Bernier said in a statement.

While CIRO would not comment directly on Wealthsimple’s approval, the organization said its role is to ensure any product a firm offers upholds the applicable regulatory requirements, including those related to investor protection.

“Forecast contracts are non-advised products, meaning firms are not required to assess suitability for individual investors. This makes it especially important for investors to evaluate whether these contracts are appropriate for them,” CIRO said in a statement.

CIRO also detailed in a bulletin online that certain events are prohibited from being included, such as the outcome of elections, political events or any other event that is considered political in nature.

Though CIRO may have limited the contracts to three categories, Jean-Paul Bureaud, executive director of FAIR Canada, an organization campaigning for investors rights, said this move could open the floodgates toward a “dangerous slippery slope” as it becomes a question of how firms will “inevitably” try to push the envelope further.

“Ultimately, it blurs the line between investing and gambling. Investing is about building long-term value through fundamentals like diversification and asset allocation,” Bureau said in a statement. “Prediction markets are shorter-term bets. Putting gambling-style products on investing platforms risks real harm to people who think they’re investing, not gambling.”

In Park’s view, this approval is a relatively “good development” as it puts this market in a controlled, regulated environment, and makes the contracts not easily manipulatable.

“Putting all of these contracts into a fold where there is a certain level of control so that insiders cannot trade and so on, I think that’s a positive development given that there is very clearly a demand for it,” Park said.

The economist found it strange, however, that political events are not being allowed for forecast trading.

“I’m of the mind of it aggregates information and it’s just a reflection of what people think, whereas there is this whole viewpoint—and comes usually from politicians—who are sort of not favoured by these markets that say that these outcomes, or these betting markets, affect how the voting will happen,” Park said. “I don’t think there is causal evidence for that.”

Platforms like Kalshi and Polymarket, which permit betting on political events, have been accused of insider trading recently over certain money moves that were made ahead of politically motivated military actions.

According to Reuters review of Polymarket’s website, US$529 million was laid on a series of contracts tied to the timing of the Israeli air strikes on Iran’s capital Tehran earlier in March, and $150 million was bet on contracts over the removal of Supreme Leader Ayatollah Ali Khamenei as Supreme Leader.

There was also scrutiny following the ouster of former Venezuelan President Nicolas Maduro, after an anonymous trader pocketed more than US$400,000 after betting he would soon be booted from office.

However, Park did applaud how the restrictions prevent sports from being included in forecast trading as he said sports betting has become far too accessible to the general public.

The Canadian Securities Administrators barred advertising, offering and trading of so-called “binary options” in 2017. However, there is an exception for CIRO’s approved members.

The CSA did not directly comment on Wealthsimple’s plans, but noted how securities regulators will crack down on any violations where securities or derivatives laws are identified—as prediction markets may involve products that fall under those jurisdictions.

“Canadians should avoid using platforms that do not comply with Canadian securities and derivatives laws and are not registered with or recognized by a Canadian securities regulator,” the CSA said in a statement, adding investors can verify whether a prediction market is recognized through their local securities regulator.

With files from The Associated Press and Reuters