Why Has Polymarket, the Prediction Market Platform, Come Under Regulatory Scrutiny? Insights for Web3 Entrepreneurs

Opportunity Amid Chaos — When “Prediction” Crosses Ethical Lines

In Polymarket’s early days, its core appeal lay in the idea that “anything could be predicted.” This extreme freedom soon gave rise to markets that teetered on the edge of ethics and legality. The most controversial among these were predictions involving personal safety and public health tragedies.

For instance, the platform briefly hosted markets like “Will a certain public figure suffer an accident?” and “Will a deadly virus infect a specific number of people by a certain date?” Once such markets were established, it meant participants could profit from others’ misfortunes—even deaths. This immediately sparked outrage among the public and regulatory authorities.

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

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  Violating Public Order and Morality: The legal system of any civilized society is founded on upholding basic public order and moral values. Betting on others’ lives and health is not only cold-blooded but also risks triggering severe moral hazards (e.g., someone might intentionally cause a tragedy to profit). This goes far beyond the scope of financial innovation and touches the bottom line that laws exist to protect.
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  Blatant “Gambling” Nature: When prediction targets are tied to public interests and personal safety, Polymarket’s self-proclaimed “information aggregation” facade is completely torn down. In the eyes of regulators, this is not “prediction”—it is naked “betting on human vice,” no different from illegal gambling.
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  Public Relations Disaster: After these markets were exposed by the media, they triggered a massive public outcry. This forced regulatory agencies to act quickly to demonstrate their stance. Bodies like the U.S. Commodity Futures Trading Commission (CFTC) could no longer stand by with the excuse of “monitoring emerging technologies.”

When Polymarket hosted prediction markets involving personal safety—markets that challenged societal bottom lines—this period of “unregulated technological growth” finally hit an invisible boundary. These markets not only sparked strong public skepticism but also served as a mirror, reflecting the social responsibilities and legal frameworks that Web3 innovation must confront in the real world.

I. Regulatory Intervention: Defining Boundaries for Innovation

These over-the-line practices prompted regulators to take action. Although Polymarket is built on blockchain and emphasizes its “decentralized” nature, its identifiable core operating team and the platform’s services— which essentially function as financial contracts—mean it cannot avoid regulatory attention.

The core view of regulatory agencies is: no matter how technology evolves, the essence of financial activities remains unchanged.

When an activity involves publicly raising funds, features transactions similar to futures or options, and impacts broad public interests, it must be brought under existing financial regulatory oversight. This ensures market fairness and transparency, and prevents potential fraud and systemic risks. Thus, regulatory intervention is not intended to deny innovation itself, but to establish necessary rules for this “exploration” and clarify the red lines of innovation.

II. Moving Toward Compliance: From “Testing Ground” to “Legitimate Operator”

Faced with regulatory pressure, Polymarket chose not to resist—but to transform.

Regulators have outlined a clear path for such innovations: to operate legally and sustainably, platforms must align with traditional financial market standards, apply for relevant operating licenses, and fully integrate into the regulatory system. This requires fundamental overhauls of the platform:

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  Establishing Strict Target Review Mechanisms: Completely eliminating prediction topics that are illegal, unethical, or manipulable to ensure the compliance of market content.
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  Building Comprehensive Investor Protection Measures: Implementing risk control systems such as anti-money laundering (AML) and Know Your Customer (KYC) protocols to protect participants from fraud.
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  Enhancing Operational Transparency and Reliability: As a regulated entity, the platform must meet higher standards for information disclosure and operational accountability.

This “compliance transformation” is essentially like putting a rein on the “wild horse of innovation,” guiding it to operate on a track that safeguards financial stability and consumer rights.

III. Lessons from Polymarket

Polymarket’s journey clearly shows that the community’s ideal of “code is law” cannot be fully realized as envisioned in the real world. 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 exploiting loopholes in rules, but about actively exploring how to use blockchain technology to improve efficiency, transparency, and inclusivity—while abiding by the core principles of existing legal frameworks—and truly contributing to society.

This requires project teams to develop stronger legal risk awareness from the outset, treating compliance as a prerequisite for product design, not an afterthought.

I. Compliance First: Embed Compliance into Product Design and Business Narrative

The “develop first, comply later” agile development model carries significant risks in this field. Once regulators intervene, the costs of disruptive business adjustments (e.g., forced removal of core markets, restructuring of KYC systems) will far exceed the upfront costs of proactive compliance.

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  Legal Qualification of Token Economic Models: Is the platform’s token a functional tool or a security? This is the first question to address. During the project whitepaper phase, teams should carefully design the token’s functionality to avoid it being classified as a security, and prepare thorough legal arguments to respond to potential regulatory inquiries.
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  User and Data Flow Planning: Compliance requirements must be incorporated into technical architecture planning at an early stage. For example: How to identify, restrict, and guide users from different jurisdictions? How to ensure user data storage, processing, and protection comply with the laws and regulations of the platform’s registration location and operating regions? These issues must be clarified during architecture design to avoid “patchwork” modifications later.
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  Value Repositioning: Build a Positive, Responsible Compliance Narrative: When communicating with regulators, prediction market platforms should not just defend themselves passively—they should proactively shape their narrative, positioning themselves as innovative tools with social value. Emphasize the positive impact of “information discovery” on the broader economy, and explore the potential of “risk hedging” (i.e., designing and demonstrating the platform from a risk management perspective). This helps integrate the platform into a broader narrative of financial infrastructure, enhancing its credibility and legitimacy.

II. Deeply Understand Regulatory Logic and Communicate Proactively: Bridging the Narrative Gap

There is a natural disconnect between Web3 terminology and the priorities of regulatory agencies. Entrepreneurial teams need to learn to communicate their business proactively and positively using “legal compliance language” that regulators can understand.

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  Translate Business Models to Address Regulatory Concerns: Regulators’ core priorities are investor protection, market integrity, anti-money laundering, and financial stability. Therefore, when describing the business, instead of saying “We are a decentralized prediction market,” teams should frame it as: “We are an information platform that uses blockchain technology to aggregate collective wisdom through economic incentives. We have built-in multiple mechanisms (such as KYC, transaction monitoring, and market review) to ensure platform fairness and compliance.” This directly connects innovation points to regulatory priorities.
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  Proactively Seek Regulatory Clarity with Strategic Disclosure and Communication: Secure professional legal advice. A legal opinion from a reputable law firm—one that deeply analyzes the legal qualification of the platform’s business model—not only serves as the cornerstone of internal risk control but also helps demonstrate to partners and regulators the team’s good-faith efforts to explore compliance and its serious attitude toward regulation. Under the guidance of legal professionals, teams may consider proactively and strategically submitting explanatory documents to relevant regulatory agencies, clearly and honestly describing the business model, risk control measures already in place, and positive social value created. The goal is to build trust and avoid sudden law enforcement actions caused by information asymmetry.
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  Explore “Regulatory Sandboxes”: Actively monitor and apply to enter fintech “regulatory sandboxes” established in regions like Singapore, the UAE, and the UK. These sandboxes provide a valuable opportunity to test products in a controlled environment while establishing direct communication channels with regulators. Experience from such proactive communication and experimentation also helps teams engage effectively with other regulatory agencies in the future.

III. We’re Here to Help: Your Global Compliance Strategy Partner

Mankun Law Firm specializes in providing cutting-edge, implementable compliance solutions for Web3 innovation projects. We deeply understand the unique challenges faced by Chinese technical teams expanding into global markets, and offer the following tailored services:

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  Global Regulatory Mapping and Architecture Design: We provide analysis of regulatory attitudes toward prediction market businesses in major global jurisdictions (the U.S., Singapore, Hong Kong, the EU, BVI, etc.). We assist in designing optimal cross-border legal structures (such as separating foundations from operating entities) to efficiently meet regulatory requirements in different regions and optimize tax planning.
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  Establishment and Implementation of Core Compliance Systems:

  (1) This includes, but is not limited to, AML/CFT (Anti-Money Laundering/Countering the Financing of Terrorism) and KYC solutions. We help screen and connect to KYC service providers that meet international standards, and customize anti-money laundering and counter-terrorist financing policies to ensure compliance with global regulatory baseline requirements.

  (2) Market review and compliance processes for launch: We assist in establishing strict legal standards for market content review, ensuring new markets pass compliance screening before launch, proactively avoiding sensitive topics such as politics and violence, and safeguarding the “lifeline” of operations.

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  Regulatory Communication and Representation: Leveraging our deep understanding of regulatory logic in China, the U.S., and Europe, as well as extensive practical experience, we can represent you in professional, effective communication with global regulatory agencies. From preparing communication materials and simulating Q&A sessions to accompanying you in meetings, we ensure your innovation value is accurately understood and your commitment to compliance is fully recognized.