Why is the prediction market platform Polymarket being targeted by regulators?

What Has the Prediction Market Platform Polymarket Actually Done?

What was its original idea? — Using money to see if your predictions are correct

Dear readers, imagine a “casino”: here, you don’t bet on sports scores or guess card hands, but instead, people use real money to predict “how the world will operate.”

“Will Elon Musk complete the payment feature on X platform by the end of October?” “Will the Federal Reserve cut interest rates by more than 75 basis points this year?” “Can a popular movie’s first-week box office surpass $500 million?”

This special “casino” is our main subject today—Polymarket. But don’t rush; labeling it as a “casino” might be an oversimplification, even an injustice. Essentially, Polymarket is a decentralized information prediction market built on blockchain.

In simple terms: it’s a “global event oracle” that uses money to vote.

How does it “play”? — Like buying stocks, but betting on the “outcome”

Polymarket’s operation is very intuitive—creating “markets” for hot events.

For example, “Will Brazil win the 2026 World Cup?” This market will have two options: “Yes” and “No.” Each option acts like a stock, with prices fluctuating between $0 and $1, representing the market’s perceived probability of the event. If you firmly believe Brazil will win, you can buy “Yes.” Suppose the current “Yes” price is $0.6 (meaning a 60% chance). Spending $60, you can buy 100 shares of “Yes.” If Brazil indeed wins, each “Yes” share settles at $1, making your 100 shares worth $100, netting a $40 profit. Conversely, if your prediction is wrong, and “Yes” drops to zero, your investment is lost.

Additionally, throughout the process, you can buy and sell these “probability stocks” anytime based on news, intuition, or other information, just like trading stocks, and profit from it.

The key point is that all these transactions are conducted with cryptocurrencies and recorded on the blockchain, publicly transparent and tamper-proof. It’s like a global, ongoing “public opinion poll” expressed through money, with prices aggregating the collective wisdom of thousands of people, often predicting event outcomes more accurately than traditional experts.

How does it make money? — Making money is its biggest goal

1. Fee model: The platform charges a fee on traders who profit from trades, which is its main and most stable revenue source. When users bet on a prediction market and ultimately profit, the platform takes about 1-2% of their earnings as a fee.

2. One-time creation fee for market creators: Users who want to initiate a new prediction topic (market) must pay a fixed fee. This not only directly generates revenue but also sets a small economic threshold to effectively filter creation requests and ensure platform content quality.

From Wild Growth to Regulatory Intervention: Polymarket’s Pioneering Journey and Regulatory Involvement

Opportunities and disorder coexist — when “prediction” crosses moral bottom lines

In Polymarket’s early days, its core appeal was “anything can be predicted.” This extreme freedom quickly led to markets that skirted the edges of morality and legality. Among the most conspicuous were those involving personal safety and public health tragedies.

For example, markets once briefly appeared on “whether a public figure will encounter misfortune” or “whether a deadly virus will infect a certain number of people before a specific date.” Once established, these markets meant participants could profit from others’ misfortune or even death. This instantly ignited public and regulatory outrage.

From a legal perspective, such markets at least violate three taboos:

• Contravening public order and good customs: Every civilized society’s legal system is built on maintaining basic public order and moral standards. Betting on others’ life and health is not only cold-blooded but could also trigger serious moral risks (e.g., some might actively cause tragedies for profit). This far exceeds financial innovation, touching the bottom line that laws must protect.
• Naked “gambling” exposure: When prediction targets are linked to public interests and personal safety, Polymarket’s self-justification as an “information aggregator” is completely torn apart. In the eyes of regulators, this is less “prediction” and more a naked “betting” on human evil, akin to illegal gambling.
• Public relations disaster: Once exposed by media, these markets trigger huge public opinion waves. This forces regulators to act swiftly and clarify their stance. Agencies like the CFTC (U.S. Commodity Futures Trading Commission) can no longer stand by under the guise of “observing emerging technology.”

When markets involving personal safety and challenging social bottom lines appeared on Polymarket, this “wild growth” of technology finally touched an invisible boundary. These markets not only sparked strong public doubts but also reflected the social responsibilities and legal frameworks that Web3 innovation must face in the real world.

1. Regulatory intervention: Defining boundaries for innovation

These transgressions prompted regulatory agencies to act. Although Polymarket is built on blockchain and emphasizes its “decentralized” nature, its core operational team as a recognizable entity and the platform’s provision of financial contract-like services make it impossible to avoid regulatory scrutiny.

The core view of regulators is that, regardless of how technology evolves, the essence of financial activities remains unchanged.

When an activity involves raising funds publicly, engaging in futures or options-like trading, and affects broad public interests, it must fall within existing financial regulatory frameworks to ensure market fairness, transparency, and prevent potential fraud and systemic risks. Therefore, regulatory intervention is not about denying innovation but about establishing necessary rules and clarifying forbidden zones for this “exploration.”

2. Moving toward compliance: From “testing ground” to “formal force”

Faced with regulatory pressure, Polymarket’s choice is not confrontation but transformation.

Regulators have pointed out a clear path for such innovations: to operate legally and sustainably, platforms need to apply for relevant licenses based on traditional financial standards and fully integrate into the regulatory system. This means the platform must undergo fundamental reforms:

• Establish strict subject review mechanisms: Completely eliminate prediction topics involving illegal, immoral, or manipulable content, ensuring market compliance.
• Build comprehensive investor protection measures: Including anti-money laundering (AML), Know Your Customer (KYC), and risk control systems to protect participants from fraud.
• Enhance operational transparency and reliability: As a regulated entity, its operations must meet higher standards of information disclosure and requirements.

This “compliance” transformation essentially tames the wild horse of innovation, guiding it to run on tracks that safeguard financial stability and consumer rights.

3. Lessons from Polymarket: Insights

Polymarket’s journey clearly shows that the community ideal of “code is law” is difficult to fully realize in practice. The “disruptive” nature of technology does not mean it can naturally exist in a regulatory vacuum.

The real challenge and opportunity lie in proactively integrating compliance design into the underlying architecture of decentralized applications. Sustainable innovation is no longer about finding loopholes in rules but about actively exploring how to leverage blockchain technology to improve efficiency, transparency, and inclusiveness within the bounds of existing legal principles, truly contributing to society.

This requires project teams to have a stronger legal risk awareness from the outset, making compliance a prerequisite for product design rather than a remedial afterthought.

Lessons from Polymarket — From Passive Response to Active Embrace

For prediction market platforms aiming at the global market, the case of Polymarket and the CFTC is a costly but crucial “compliance enlightenment.” It clearly reveals a reality: in today’s global regulatory environment, compliance capability is no longer a cost center but the core competitive barrier and foundation for survival.

Sustainable innovation is no longer about exploiting loopholes but about actively exploring how to leverage blockchain technology to enhance efficiency, transparency, and inclusiveness within the framework of existing laws, truly benefiting society. For tech-savvy and globally minded entrepreneurial teams, the following three compliance paths can provide practical help in balancing innovation and regulation.

1. Pre-emptive compliance: Embedding compliance genes into product design and business narrative

“Develop first, then comply” is a risky approach. Once regulators intervene, the disruptive costs (such as forcibly removing core markets or reconstructing KYC systems) will far exceed early preventive compliance costs.

• Legal qualification of token economy models: Is the platform’s token a functional tool or a security? This is the primary question. During the white paper stage, carefully design token functions to avoid securities classification and prepare thorough legal arguments for potential regulatory inquiries.
• User and data flow planning: Pre-plan compliance requirements in technical architecture. For example, how to identify, restrict, and guide users from different jurisdictions? How to store, process, and protect user data to meet local laws? These must be clarified during design to avoid “patchwork” modifications later.
• Reframing value: Build a positive, responsible compliance narrative for prediction market platforms. When communicating with regulators, don’t just passively defend but actively shape the narrative, positioning it as an innovative tool with social value. Emphasize “information discovery” for the overall economy, explore “risk hedging” potential, and design from a risk management perspective. This helps integrate the platform into broader financial infrastructure narratives, enhancing its seriousness and legitimacy.

2. Deep understanding of regulatory logic and proactive communication: bridging the narrative gap

Web3 terminology and regulators’ concerns have inherent gaps. Startup teams need to learn to speak the “legal compliance language” understandable to regulators.

• Translate business models and respond to regulatory concerns: Core concerns are investor protection, market integrity, anti-money laundering, and financial stability. When describing your business, don’t just say “we are a decentralized prediction market,” but explain: “We are an information platform using blockchain technology, aggregating group wisdom through economic incentives, with built-in mechanisms (like KYC, transaction monitoring, market review) to ensure fairness and compliance.” This directly links innovation points with regulatory concerns.
• Actively seek regulatory clarity with strategic disclosure: Obtain professional legal advice—an opinion letter from a law firm analyzing the legal nature of your platform’s business model is the foundation for internal risk control and helps demonstrate your proactive, serious compliance efforts to partners and regulators. Under legal guidance, consider proactively submitting explanatory documents to relevant authorities, clearly and honestly describing your business model, risk control measures, and positive societal value, to build trust and avoid sudden enforcement actions due to information asymmetry.
• Explore “regulatory sandbox”: Actively apply to enter fintech “regulatory sandboxes” in regions like Singapore, UAE, UK. These provide valuable opportunities to test products in a limited environment and establish direct communication channels with regulators. Such proactive engagement also benefits future communication with other authorities.

3. Supporting your global compliance strategy

Mankun Law Firm specializes in providing cutting-edge, practical compliance solutions for Web3 projects. We deeply understand the unique challenges faced by Chinese tech teams expanding globally and offer tailored services:

• Global regulatory mapping and architecture design: We analyze the regulatory attitudes of major jurisdictions (US, Singapore, Hong Kong, EU, BVI, etc.) toward prediction markets, helping you design optimal cross-border legal structures (such as foundations, operational entity separation) to efficiently meet different regional requirements and optimize taxes.
• Core compliance system setup and implementation:
• (1) Including but not limited to AML/CFT and KYC solutions, helping you select compliant KYC providers and tailor anti-money laundering and counter-terrorist financing policies to meet global standards.
• (2) Market review and onboarding compliance processes: assist in establishing strict legal standards for market content review, ensuring new markets pass compliance checks before launch, proactively avoiding sensitive topics like politics and violence, safeguarding operational viability.
• Regulatory communication and representation: With deep understanding and practical experience in Chinese, US, and European regulatory logic, we can represent you in professional, effective communication with global regulators. From preparing communication materials, mock Q&A, to accompanying meetings, we ensure your innovative value is accurately understood and your compliance intentions are fully recognized.