Integrity Test for Prediction Markets

This article is an opinion piece by Lee Hills, Founder of eGaming Integrity.

Prediction markets are an emotive topic. They occupy an increasingly disputed space between finance, entertainment, gambling, speculation and public information. Global regulators with limited current exposure, especially in Europe, have taken an unusually proactive stance in public messaging regarding their opinion on the regulatory status of these prediction markets. Perhaps fearing an unregulated parallel activity to those they do regulate, introducing an entire segment free from the protections they have been developing and enhancing for years. 

The debate around what they are and how regulation and consumer protection should be framed around them has been struck by a lightning rod in the form of a Wall Street Journal investigation alleging that apparently significant positions on Polymarket may not have reflected genuine market conviction at all.

The Wall Street Journal investigation concerns Polymarket’s promotional activity, raising serious questions about how prediction markets are being marketed, how users are being acquired and whether the industry can continue to rely on the language of transparency while operating in the same attention economy as crypto, sports betting, day trading and social media influence. According to the Journal, Polymarket paid creators to produce videos that appeared to show real trades and large wins, when the trades were in fact simulated on replica versions of the Polymarket website. The report said the Journal reviewed more than 1,100 videos from creators promoting the platform, with hundreds appearing to show trades that were not real. Some videos allegedly used outdated footage, altered headlines or false context to suggest winning outcomes. Others presented prediction markets as a source of “free money”, a phrase that should make any regulator sit up very quickly.

Polymarket has said it is committed to accurate, fair, and transparent markets and that it is reviewing active promotional content. That response may be important in due course, but the question is no longer simply whether prediction markets should be regulated as gambling, derivatives, financial contracts or something else. The question is whether the whole ecosystem around them can be trusted.

It is important to remember that prediction markets are neither inherently good nor inherently bad. The model is here and users like it. The fact that they often prefer it to traditional offerings, which scares bookmakers and gambling regulators, should not distract from the focus. Which legal construct they belong to and therefore which regulator will likely be a matter for the courts. The focus should centre on how they are operated, marketed and distributed, and how they can be manipulated. 

A prediction market may be technically transparent at the point of trade, while the business around it remains opaque. Prices may be published, outcomes may be settled against visible rules, and some products may even operate on blockchain rails, giving the public a level of audit that many traditional products cannot offer. However, none of that means much if the surrounding promotional environment is synthetic, misleading or designed to create a false impression of profitability and ease. Transparency in the market is not the same as transparency in the business.

That is where the Polymarket story is so important. The concern is not just that a few young creators may have exaggerated their success online, because that happens in every corner of the internet. The more serious concern is that a product which presents itself as an information market may have been promoted through content that created a false impression of participation, profitability and opportunity. If a creator appears to win a large sum on a trade that was never actually placed, the harm is not limited to a single video. It alters the viewer’s perception of the product. It suggests liquidity, confidence and social proof. It turns a speculative contract into a lifestyle performance and moves the user from analysis into imitation.

That is exactly where prediction markets begin to look less like sober information tools and more like the next stage of gamified finance. The industry’s strongest argument has always been that prediction markets aggregate dispersed information. Rather than relying on pundits, polls or committees, they allow people to express confidence through capital. In theory, this can produce useful signals. Markets can digest public information quickly. They can reveal probabilities more dynamically than commentary. In some contexts, they may even help institutions understand risk. That argument still has merit, but it becomes much harder to defend if the route to scale depends on influencers pretending to place large trades, simulated balances, staged outcomes, apparent wins and undisclosed payment relationships. The same is true of viral clipping networks designed to look organic. A market that claims to reveal truth cannot afford to grow through artificial truth.

This does not mean prediction markets should be dismissed entirely. In fact, the opposite may be true. The Polymarket controversy strengthens the case for serious regulation because it shows what happens when a fast-moving product is left to develop through regulatory ambiguity, offshore access and social media growth tactics. The mature response is not to say that prediction markets should not exist, but to ask what version of them should be permitted to exist.

A properly governed prediction market should not be judged only by its matching engine, liquidity or settlement mechanism. It should be judged by the conduct of the entire business. That includes how markets are selected, how outcomes are resolved, how conflicts are managed, how material information is handled, how users are onboarded, how vulnerable users are protected and how the product is promoted. Advertising is not a side issue. It is now one of the main issues.

A platform that allows users to trade on political events, public announcements, celebrity behaviour or policy decisions is already operating close to sensitive social and informational territory. When that same platform is promoted through content implying easy money, insider advantage or artificially staged outcomes, the risk profile changes completely. 

There is also a market integrity point that should not be overlooked. Prediction markets often involve events where someone, somewhere, may have private information. A musician knows when an album will be released. A political adviser may know when an announcement is due. A company employee may know when a product launch is planned. A sports insider may know about an injury before the public does.

Traditional financial markets have developed complex rules around market abuse because private information can distort prices and damage confidence. Prediction markets cannot simply avoid that discussion by saying they are not securities. The range of events available to trade may even make the issue harder. That does not mean all informed trading can be eliminated, but it does mean a serious platform needs a serious answer.

The same applies to resolution. In many markets, the outcome is obvious. A candidate wins an election, a team wins a match, or a central bank raises rates. In others, wording matters enormously. It may come down to whether a public figure said a particular word, whether an event happened before a deadline, or whether an article counted as confirmation. It may also turn on whether a platform changed the clarifying rules after traders had already taken positions. Anyone familiar with gambling regulation will recognise the problem. Terms, settlement rules and customer communications are not administrative details. They are the product.

The regulatory classification of prediction markets will continue to be debated. In the United States, the conversation is bound up with the role of the CFTC, state-level gambling law and the emergence of regulated competitors such as Kalshi. In other jurisdictions, the same product may look more like betting, contracts for difference, spread betting, financial promotion or digital asset activity depending on how it is structured. That uncertainty is precisely why serious jurisdictions should engage with the sector rather than ignore it.

There is a useful distinction to be made between prediction markets as a concept and the behaviour of particular operators. Properly designed, event markets can help aggregate information, price uncertainty and encourage more disciplined forecasting. Poorly governed, they become another way to monetise attention, impulse and belief. 

That starts with clarity on the licensing perimeter, proper advertising standards and controls around affiliates, influencers and paid creators. Age and location controls also need to be more than cosmetic.

AML and financial crime systems have to be proportionate to the risks. There also needs to be governance over market creation and resolution, proper policies for insider information, conflicts and suspicious trading, and customer risk warnings that are actually meaningful. Platforms also need to be honest about the limits of innovation. New product models still need proper conduct standards. Some risks become sharper when the product is new.

The future of prediction markets will be shaped in large part by legal classification. That becomes harder when hype is allowed to outrun trust. The sector needs fewer slogans about free money and a far greater emphasis on governance, conduct, consumer protection and market integrity. 

With so much uncertainty around the world, the easiest course for regulators may be to treat prediction markets as gambling and regulate them accordingly. Operators that want to resist that outcome will need to demonstrate the standards expected of a serious regulated market. Governance has to be clear. Controls need to be robust. Conduct has to be transparent, with effective consumer protection and credible market integrity sitting behind it. The test across every part of the business is whether each decision is good not only for the operator, but for the credibility of the industry as a whole. 

It is always important to remember that integrity can cost income in the short term, but it creates the trust on which long-term value depends.

A version of this article was first published by The Armchair Trader.