Prediction markets are threatening national security. Who's gonna fix it?

0:24Thank you.

0:35Prediction markets have an insider trading problem. Yeah, I remember that American Special Forces soldier who was just arrested for allegedly betting on the capture of Venezuelan President Nicolás Maduro, a mission he was apparently a part of. I can't believe the story, but that is the world we're in these days. It's mind-boggling. Could have been easy money. Still, prediction markets are economically useful. They can provide real-time sentiment on things like inflation or the possibility of a recession. And as we know from the last presidential election, they're often more accurate than political polls.

1:11Good, bad, or neutral, though, these markets create new problems for regulators. This is The Indicator from Planet Money. I'm Darian Woods. And I'm Ricky Mulvey. Today on the show, we're looking into how these markets can be regulated. We'll see how Polymarket is fighting insider trading. And we'll check in with Democratic U.S. Senator Richard Blumenthal, who is hawkish on prediction market regulation. By the way, this question of regulating prediction markets is so new that in our interview, we shared one of those questions that the senator hadn't even considered yet. I suspected it was there, but I didn't know there was so much.

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3:07Investing in securities involves the risk of loss. Polymarket has taken a few steps to combat insider trading, but it's also in an interesting position. It has a U.S. regulated business in the front and an unregulated international cryptocurrency party in the back. You're saying they've built a sort of a prediction market mallet. Exactly. And the difference between these two businesses is key. In the U.S., markets must know who their customers are. But here's the thing. The majority of Polymarket's trades are done in its international business. And that's the Wild West. Traders can operate anonymously using cryptocurrency.

3:42Still, everybody can see those bets, even if they don't know exactly who's placing them. And that means unusual trades immediately stick out, like that bet on the U.S. attacking Venezuela. And Polymarket did cooperate with the Department of Justice to identify Gannon Ken Van Dyke, the soldier who allegedly placed trades on military action in Venezuela. So actually, he wasn't that anonymous. Right. Polymarket recently partnered with a third-party investigator to track cryptocurrency movements across the blockchain. They want to track down suspicious trades. That third-party company is called Chainalysis.

4:19They specialize in fraud detection in the crypto space. Adam Hart works on its investigations team. He says crypto is not a black hole that covers up bad behavior. If you look at the record of kind of public sector agencies seizing illicit funds in the past five years. Some of the best tracers in the world are in the US government. You can look at reports from the IRS Criminal Investigation Service, and they're seizing more money in crypto than they are in kind of all other assets combined. Transactions are written into the blockchain, the blockchain being the list of all the trades made with the cryptocurrency.

4:55Investigators can look at that list. So all you have to do is make one mistake. And that evidence is there forever. We don't have to catch it today. We might figure it out in five years from now, but that evidence is still there. Van Dyke allegedly asked Polymarket to delete his account after the trades cashed in. The Department of Justice says he even tried to change his email address registered to his crypto exchange account. A sophisticated criminal might be more careful. They can try to evade detectives using fresh wallets, hiring money launderers, and using coins that promise to be untraceable.

5:30And if they are located internationally using Polymarket's international side, bad actors may be out of reach of US authorities. In other words, congrats, you found the account that was insider trading. The bad news is that they're located in North Korea. These crypto detectors have one advantage though. It's tough to hide your identity when you want to cash out for real dollars. Many people, you know, you're cashing in and cashing out at a regulated entity And that regulated entity is where investigators would go to to identify, you know, that link between the on-chain address and your identity in the real world.

6:05So Polymarket wants to track insider trading, but it would rather play a cat and mouse game after the fact than check the identities of everyone participating. Senator Richard Blumenthal, a Democrat from Connecticut, believes that Polymarket can't have it both ways, having both a U.S. regulated website and an unregulated non-U.S. website. They really are an American company. They do have an American platform. They say one of their platforms is offshore, but that is a fiction that we need to cut through. He also wants to restrict the kinds of markets these platforms have. Very broadly, he wants to ban markets that are susceptible to manipulation and those that threaten national security.

6:47I think there ought to be a ban on prediction market bets concerning wars, assassinations, certain kinds of events where because of the event itself or because of the kind of information that's involved, there's a public interest in banning those kinds of event contracts. The question for regulators, though, is how much regulation is too much regulation? Richard's bill, the Prediction Markets Security and Integrity Act of 2026, is a sweeping piece of legislation. It would treat them more like sports books that are regulated by state commissions. Of course, FanDuel and DraftKings are just gambling.

7:29They also take a big chunk of each bet. On the other hand, while prediction markets do have sports bets, they take a smaller cut. And they also help answer big questions like who's going to be the next president. So do you see an economic utility in this? And is it important to preserve that? Well, first, let me make clear, I'm not banning gambling. I'm not in favor of prohibiting gambling, nor am I trying to abolish prediction markets. And the competition between them may be a good thing if it cuts the cost to the betters and makes the whole process more transparent and more fair. The laws that I proposed to provide for greater oversight to online gambling and to make the prediction markets more honest and transparent are designed to protect consumers, bettors, everyday people from the kind of concealment, insider information, national security leaks that can harm the public interest.

8:30Regulators are still figuring out what they should even regulate. This is where those screenshots come in that we shared with the senator. His bill would limit how prediction markets advertise on broadcast television, but not social media. We showed him some TikTok ads, including this one. You made money off of gas prices going up? How? Dude, I'm on Kalshi. You can trade on stuff like weather, sports, news, gas prices, all kinds of real world stuff. And I love it because you can see the potential return before you even place a trade. Another ad showed a woman claiming she was able to pay her rent because of the money she made on Kalshi predictions.

9:03In my view, those ads potentially run afoul of existing consumer protection laws, federal laws that prohibit deceptive and misleading marketing, as well as state laws that mirror those federal laws. His point is that there are existing federal laws that could be applied here to these types of social media ads. And I'm going to be taking action to make sure that laws are enforced against existing ongoing violations of the protections on the books right now. What's clear is that prediction markets are a new frontier, even for a senator who proposed a law to regulate them, but isn't a TikToker. Although maybe Richard just needs to step up his social media game.

9:46It's like the dark side of the moon. I suspected it was there, but I didn't know there was so much of it. So it seems like the politicians and the platforms are still figuring it out.

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