The writer is professor of economics at Barnard College, Columbia University
It is impossible to open a bank or brokerage account in the US without going through a process of identity verification. The same is true for regulated prediction markets such as Kalshi. Yet on Polymarket’s main crypto-based exchange, the real-world identities of millions of account holders are invisible.
The protection of anonymity allows for multiple accounts to be operated by a single individual or entity and makes it easier to disguise certain practices that are prohibited by law – including trading on classified information. Manipulative trading practices that are banned on regulated exchanges also become easier to implement.
So far, the attention has focused on insider trading. Last month, an American soldier involved in the capture of Nicolás Maduro was arrested after allegedly making over $400,000 in bets on the timing of Maduro’s removal from power. The soldier’s attempts to conceal his identity were clumsy — a personal email was linked to his account. He has denied the charges he faces. A more sophisticated actor, using the chain-hopping, mixer services and layered wallet structures described in the US Treasury’s 2026 money laundering risk assessment would be hard to identify.
The presence of potential insiders changes the incentives faced by other traders. Looking for unusual directional bets becomes lucrative. Tools like ‘Insider Finder’ have been developed for precisely this purpose. If insiders can be identified, mimicking their behaviour can be profitable. So can trading in a manner that leads others to believe you are an insider and opt to copy your trades.
Anonymity also enables wash trading. This is a form of volume manipulation involving transactions by clusters of colluding counterparties. I have been working with colleagues at Columbia University to develop a procedure for identifying it and we estimate that wash trading accounted for 60 per cent of total trading volume at Polymarket in December 2024. Polymarket said that it was reviewing the study. The recent imposition of trading fees is likely to reduce this, but in the absence of identity verification, the capacity to manipulate volume by operating multiple wallets remains in place.
Polymarket has a US subsidiary but its main prediction market was exiled in 2022. It is seeking approval from regulators to reverse that ban and formally re-enter the US. Although the ban has been easy to circumvent by traders with VPNs, its removal will probably attract new users to the exchange.
Approval should therefore be conditioned on some form of identity verification. The Genius Act imposed know-your-customer (KYC) compliance on issuers of payment stablecoins last year. Regulators should apply the same logic to crypto-based prediction markets.
There are three approaches to this. The most direct is KYC compliance on the platform itself. Another option is to require that crypto transfers in and out pass through approved issuers who are KYC compliant. This would allow suspicious activity, once identified, to be easily traced.
A third option, recently proposed by a Stanford-led team of academics, involves privacy-preserving digital certificates. These are credentials issued by authorised service providers that confirm a user’s identity has been verified, without revealing it to the platform. Uncovering identities would require a court order.
Online prediction markets have been around for almost four decades but have dramatically increased in popularity over the past couple of years. They can serve an important function by aggregating dispersed information and leveraging the wisdom of crowds. But their promise will not be fully realised without building trust. That means weeding out insiders and manipulators and knowing exactly who is trading on the platform.
Source: https://www.ft.com/content/c4612f76-49a2-478a-b755-bee9d6106db7
