Crypto prediction market takes off ahead of US elections

With the US presidential elections coming up in less than five weeks, the blockchain-powered prediction market is in the spotlight of the regulators. Let’s delve into their fears.

The success of the fast-growing crypto or Web3 prediction market is astounding. One of its main advantages is its decentralized structure. Its emergence has, in one go, eliminated all middlemen. This in one turn eliminates potential bias or even censorship that exists in traditional betting markets. The nature of blockchain-powered prediction markets additionally provides transparency, as all bets are recorded on an immutable ledger.

The decentralized nature of blockchains also enables global participation in this emerging decentralized prediction market. Anyone with internet access can place their bets, something that was previously restricted by legal or geographical barriers. However, there the crypto prediction market isn’t full of positive aspects. Regulators around the world are sounding the alarm.

Regulators wary of the rise of Web3 betting platforms

Earlier this summer,the US Commodity Futures Trading Commission (CFTC) warned that it is keeping a close eye on offshore crypto betting platforms, as their contracts involve bets on future events and thus could fall under their oversight. The European Securities and Markets Authority (ESMA) and the UK Financial Conduct Authority (FCA) also monitor the situation closely.

Polymarket, Kalshi and Gnosis are some of the largest crypto prediction players today. The surge in interest for their bets has primarily been driven by the upcoming US presidential election on November 5. But the number of topics that users bet on range from the size of the Federal Reserve’s upcoming rate cut, whether there will be another debate between the two US presidential candidates, who the winner of the Premier League in the UK will be or whether the price of Ethereum will exceed $3,000 next week. The regulatory status of these decentralized prediction markets is highly complex, as they are inherently borderless. A legal headache for regulators.

Concerns over KYC non-compliance, manipulation risks & money laundering breaches

But what do regulators fear? Non-compliance with know your customer (KYC) regulations and breaches of money laundering rules, as well as feared market manipulation by people holding onto insider information are the main areas of concern, but there are also the ethical questions that crop up when it comes to betting on upcoming elections or key political decisions.

Additionally, betting on crypto prediction platforms could qualify as gambling, a heavily regulated activity, potentially circumventing current legislation. Regulators have also raised concerns about insufficient consumer protection within this rapidly growing market. Notably, the recent launch of highly speculative derivative contracts, such as Synfutures' perpetual contract for the US election victory rate, allows traders to leverage up to 10 times on Trump’s or Harris' potential win. Similarly, Helix, Injective’s decentralized exchange, offers election prediction markets with up to 3 times leverage. These and other developments have caught the attention of regulators, with the CFTC already issuing warnings to Polymarket and similar platforms, cautioning that enforcement actions will be taken against those violating existing derivatives rules.