UK regulators are being called upon to take action as it has come to light that the online betting platform Polymarket has facilitated thousands of dollars in wagers concerning the potential failure of major banks such as HSBC and Lloyds.
Polymarket, a US-based entity that allows bets on a variety of events ranging from sports outcomes to speculative scenarios, has enabled users to place approximately $77,507 (£58,530) in bets on whether prominent financial institutions, including HSBC, Lloyds, JP Morgan, and BNP Paribas, will collapse by the end of the current year.
Although users from the UK, US, Canada, and the EU are prohibited from placing bets on Polymarket’s offshore platform, participants from around 150 other countries can potentially profit from scenarios that could induce significant financial turmoil and jeopardize economic stability.
In response to these developments, the UK’s Financial Conduct Authority (FCA) indicated to the Guardian that it has engaged with international regulators to discuss prediction markets as part of its initiative to safeguard “market integrity.”
Concerns are mounting regarding the potential for insider trading and market manipulation on Polymarket, where unscrupulous individuals might seek to profit from online wagers in ways that could destabilize the banking sector. This concern is particularly pertinent given the recent history of bank collapses, such as those of Silicon Valley Bank and Credit Suisse in 2023, which were exacerbated by social media-driven panic and rapid customer withdrawals.
Bobby Dean, a member of the Treasury committee and Liberal Democrat MP, emphasized the need for UK authorities to take action. He criticized Polymarket for its inadequate measures against insider trading and suggested that the platform could be exploited to provoke significant shifts in market sentiment. “If betting activity related to banks increases on this platform, it could lead to scenarios where bank runs become a reality,” Dean warned.
Dean urged regulators to connect with their US counterparts to express concerns. He noted that while the current risk level may seem manageable, the rapid changes in this sector demand vigilance.
In response, Polymarket executives defended their platform, claiming that the bets do not pose a problem. They argued that the platform democratizes access to market information that has historically been available only to elite traders and institutions. Neal Kumar, the company’s chief legal officer, stated, “The information in these markets is already public. Financial institutions have long had access to these types of data, and Polymarket levels the playing field.”
However, some scholars have cautioned that such platforms create moral hazards, incentivizing participants to engage in unethical or illegal behaviors to influence outcomes.
Furthermore, the European Securities and Markets Authority (ESMA) recently highlighted in its semi-annual risk report that “an increasing number of incidents show that prediction markets are prone to insider trading.” The report notes that risks related to market manipulation and insider trading are heightened in prediction markets, particularly those utilizing distributed ledger technology like Polymarket, which operates with limited identity verification.
Polymarket’s offshore platform relies on blockchain technology, linking accounts to crypto wallets that are traceable yet challenging to attribute to specific individuals. Although the platform is based in the US, it caters to a global audience while maintaining user anonymity. Some users from restricted regions have found ways to circumvent these limitations through virtual private networks (VPNs), violating the platform’s terms of service.
ESMA cited instances such as the US-Israel military strike on Iran in February, which saw newly created wallets reportedly netting $1.2 million in profits just before the operation became public knowledge. This follows allegations involving a US soldier charged with using classified information to place bets on Polymarket in advance of the operation against Venezuela’s leader, Nicolás Maduro.
Additionally, in April, law enforcement was alerted regarding suspected manipulations of weather sensors at Charles de Gaulle Airport, which were used to settle weather-related contracts on Polymarket.
The Bank of England noted that its supervisors regularly engage with firms on various market trends and emerging risks. Both Lloyds and HSBC opted not to comment, and the Treasury did not provide a response to inquiries.
