Polymarket’s Regulatory Hurdles, Pre-IPO Betting Boom on Prediction Markets, AI Increasing Workloads

0:13Stephanie Palazzolo:Welcome, everyone, to The Information's TI TV. My name is Akash Pasricha. It is Wednesday, May 27th. Before we get into today's lineup, tickets are now on sale for The Information's annual AI Agenda Live Conference. It is taking place in San Francisco on September 23rd at SFMOMA, the Museum of Modern Art. You can now lock in early bird pricing. We have more details on our events page at theinformations.com slash events. First up in today's show, the information published exclusive reporting about the regulatory questions that Polymarket is facing, not just in the United States, but all around the world.

0:51Stephanie Palazzolo:I'll bring on our finance reporter to talk about how customer identification is an issue that is front and center for the company. I'll then be chatting with our crypto reporter about how Polymarket and Calci are capitalizing on the SpaceX IPO. I'll also then speak with the CEO of IT and customer services company Freshworks about why AI is creating more work for some people rather than reducing it. And we'll wrap the show with some exclusive reporting about a big funding round from Base10 and a look at why developers are whispering to their AI agents. It's going to be a fun show, so let's get right on into it.

1:30Stephanie Palazzolo:Polymarket has run into some questions around insider trading that might be growing on its platform. And a new exclusive story from The Information Today looks at how the company's approach to customer identification rules could also be a threat to the company's operations in the long run. I want to bring on our finance reporter, Michael Rodden, to share more about what he found. Michael, welcome back to the show. It's great to have you here. G'day, Kash. Okay, how did you decide to pursue this story, Michael? Well, Polymarket's got a lot of problems at the moment. It's losing a lot of ground to its main rival, Kaoshi, which has this US operations where it knows exactly who its customers are, what they're doing, where they're located.

2:15Polymarket's very different. It left the US in 2022 when the government essentially banned it. And so people have been accessing Polymarket's global platform using VPNs that sort of shroud their identity. this is important because polymarket has a lot of rules that it needs to abide by like one not letting people in the u.s trade on its global platform but also things like sanctions laws so people in say for instance russia or iran where it's a really it's a it's a no-no to be able to serve customers in those places uh what i found was that you know it's quite easy to start trading on polymarket from these jurisdictions um you know a lot of people are setting up their own trading bots to run and serve Russian customers.

3:01There's Iranian influencers that are sort of coaching people about how to access the platform. And this is becoming a big problem. And so Polymarket is taking very tiny little steps to identify the traders who use its global platform.

3:16Stephanie Palazzolo:What are these tiny little steps that Polymarket is taking? So a couple of days ago, they opened a portal on their website. It's very sort of discreet, but it says if you want to access uh you know our the fastest trading times so that'll get you milliseconds ahead of your competitors who are also trading on the platform you're going to want to submit your id you're going to want to tell us who you are you're going to want to say where you are and if you're a business customer like any number of the trading applications or interfaces that sort of build on top of polymarket that is sort of driving a lot of volume to this exchange They want to know who your investors are, what kind of entity your company is structured by.

4:01And for now, this seems like a voluntary measure. They're trying to coax people to give over their ID because for a long time, this exchange has been the Wild West. And that's drawn a lot of customers to it. People don't want to let Polymarket know who they are for, you'd have to ask them. but you know some of the comments in online forums when this was announced suggested that people were sort of wanting to dodge tax you know they didn't want the irs finding out that they were trading and of course there are people in you know 30 or so countries that are essentially banned from using polymarket that still want to access there and trade on everything from you know the weather to what elon musk is going to tweet to the war in iran and what happens there

4:50Stephanie Palazzolo:So when we hear about – so KYC is this acronym, Know Your Customer Rules. These are – this is the method of identification that, I mean, banks use it. I think trading platforms use it. It sounds to me like – so Polymarket is not using it. It's sort of – it's getting closer to that type of identification? or where does what you just described sort of fall in the spectrum of customer identification rules? Yeah. So it's like, if we want to go way back, these rules were brought in to fight sort of drug laundering from, you know, South American cartels, you know, decades ago. They wanted bank, the government wanted banks to essentially really identify who was using their services, who's putting money in, who's taking it out, why are they doing that?

5:42And this now applies to pretty much every financial sort of institution under the sun. And Polymarket's in this process of going more legit. So it's run by like these young guys who are operating on the blockchain. It's in cryptocurrency. It's anonymous. And that's part of the appeal. It's very fun. But now that they're trying to be like this big regulated institution, like that is competing with sports books and casinos that also have to comply with things like KYC laws. They have to know who their gamblers and bettors are. Polymarket's trying to edge that way to try and become like a bona fide financial institution.

6:27It's in the process of setting up this regulated US exchange where it has to actually identify its customers and know who they are and know what they're trading uh and if it wants its global platform to survive these sort of regulatory problems then it'll actually need to apply those rules to it as well because you see increasingly a number of countries around the world uh trying to ban polymarket they don't like it so we've seen the netherlands um ban it just uh yesterday or the day before spain put a new ban on it um australia has banned it um so it's like they're facing a lot of problems about you know how to operate this exchange in a global environment where a lot of uh countries governments don't actually

7:15Stephanie Palazzolo:want them to operate so is it inevitable then that polymarket will put in place these customer identification rules i mean kyc i'm not sure if it's just here in the u.s or a bit of a dilemma Right. So I guess what I'm asking is, is this inevitable? I mean, will poly market need to implement these formal identification guidelines to scale their business going forward? It's really not clear. They have to walk a fine line between wanting to keep this huge rump of anonymous traders happy. They want to have that trading volume. They want to earn fees off that. and if they go if they move too fast in instituting um you know kyc then these people are just gonna get pissed off and leave um right but uh but but the other option is that you just get shut down and you do what you can't you get shut down but it's it's very unclear what the law is or or who is going to enforce it at the moment you know it's like if you look at the the actual regulator for that's for polymarket it's the cftc uh and that has been extraordinarily friendly to the prediction markets so polymarket and koushi uh they basically rolled out the red carpet for it and the the government under the trump administration uh has essentially sort of uh washed its hands uh of of sort of enforcing the law on these companies um right a lot of the state governments in the u.s have tried to use the courts to shut down Polymarketing Cowsheet.

8:50And the regulator, the CFTC, has actually come in on the side of Polymarketing Cowsheet and is fighting those cases for them. So it's very unclear where the law is going to settle at the moment.

9:01Stephanie Palazzolo:Can I ask, Mike, you've been covering banking and financial institutions and crypto and prediction markets. You've sort of covered everything under the sun here. What is your best guess here as to how this plays out based on what Polymarket is telling you, you know, the indications that they're giving to their customers? I'm thinking about crypto and I'm thinking about the ways in which crypto did grow up in some ways. Debatably. Yeah, OK. I should say they were forced in some ways to grow up. You know, they had crises on their hands. There was fraud in the mix. So, I mean, is it likely that we have some sort of acute event here that basically pushes regulation forward in this arena?

9:52At the end of the day, these are gambling companies and they're taking a massive gamble on the future of their business. They've got, what, two and a half years left of the Trump administration. you know, there's a chance that, you know, a democratic government will come in afterward and they will most likely move to really rein in these companies. So, you know, they've got two and a half years to either get their house in order or just take a bet that things are going to be hunky dory for another four years after that. So yeah, it's, I can't predict the future, but maybe the people on Polymarketing Cowshi can.

10:33Well, it's a good place to end it.

10:35Stephanie Palazzolo:That is a great story, Michael. I want to thank you for coming on and sharing with us your reporting. That is Michael Brodin, our finance reporter here at The Information. For more Predictions Markets coverage, I want to bring on our crypto reporter, Yueqi Yang, who covered how Polymarket is using the SpaceX IPO as an opportunity for its business. She wrote about that in today's finance newsletter. Yueqi, welcome back to the show. It's great to have you here. Hey, Akash. Okay, so we just finished talking with Michael about the regulatory questions that Polymarket's facing, and that is certainly something I know that you are well-versed in given your crypto reporting career.

11:16Stephanie Palazzolo:But I want to talk to you about SpaceX, which is not a company that you typically cover on your beat. How is it that prediction markets are looking ahead to the SpaceX IPO? Prediction markets, especially poly markets, are offering bets that allow investors to bet on the valuation of SpaceS, OpenAI, Anthropic, all these hottest startups that are gearing up to go public. And I think this is very interesting because historically, as you know, retail investors have a hard time accessing equity in private companies because of the limited disclosures that these companies make. And Polymarket is making this alternative way to effectively allow their users to express a view on the valuation of a company and to potentially benefit from it.

12:10And so I look into this topic and some of the potential regulatory restrictions and limits that they will run into. Most of these bets are only available outside of the U.S. They're not available to U.S. users. And that's because the contracts resemble too much as securities. And they can't really offer that in the U.S. without running into troubles with U.S. securities laws.

12:36Stephanie Palazzolo:Right. Okay. So the regulatory questions are one side to this. I kind of want to dig a little bit deeper into sort of this parallel universe of trading on IPOs that prediction markets have created. Can you just give us a flavor? What is a sample bet, I guess, that you could place on poly market as it relates to the SpaceX or OpenAI IPO? Like, is this, is it like literally like what you think it's going to open at? You can bet on what's the market cap for Anthropik by the end of June. And there are all these probabilities and different numbers that you can bet on. For example, I think the most popular one is showing that Anthropik will reach more than$1 trillion of market cap at the end of June.

13:31And you can also bet on, for example, what's the market cap of SpaceX at the end of the first day trading after its IPO. So there are odds for different numbers as well.

13:44Stephanie Palazzolo:So how is that any different than from buying a stock? There's a big difference. If you buy a stock, you're the actual owner of a stock. Right. I guess maybe more what I get is what's the benefit of one versus the other? Like, is prediction markets easier to buy? Is it better? What's the benefit here? If you buy a real stock, you get the actual ownership, which comes with all the investor protections and investor rights, such as the right to vote, the right to receive dividends. If you bet on prediction markets, you are really just speculating on the price index for this company's valuation. and you don't have any investor rights.

14:27And however, these markets are accessible to offshore investors and especially retail investors offshore who historically do not have means to get access to private company shares. So there's pros and cons to it.

14:43Stephanie Palazzolo:Now, the interesting part that you pointed out, though, in your newsletter is that, I mean, you've got companies like NASDAQ, which are actually getting involved in the prediction markets products that are associated with these stock trades. Can you expand a little bit on how NASDAQ is getting involved? NASDAQ is providing the data on private company valuations that Polymarket will be able to use to settle their contracts. So this is a partnership that they entered recently and that allows Polymarket to point to the NASDAQ data and say this is the price for Anthropik's valuation or for opening-up valuation at the end of June.

15:29And that's the price that they will use to decide who is winning the contract.

15:34Stephanie Palazzolo:Okay, so why is NASDAQ doing this, though? I mean, this is conceivably a way to dissuade people from actually buying a stock and more towards just trading on a prediction market. What's the business logic here for them, do you think? Yeah, I don't think it necessarily cannibalizes with Nasdaq's business because I think they're kind of tapping into this new market that's offshore, that's maybe retail-oriented, that historically couldn't really get access to private company shares. If you're accredited U.S. investors and you have proper means to buy these stocks, you probably wouldn't go to prediction markets to make the bet.

16:18Right.

16:18Stephanie Palazzolo:And so the key there is that the bets that you're referring to on the prediction markets, betting on the SpaceX IPO, et cetera, these are all products that are only available outside of the United States. Yes. And that's a very important part to highlight. And I think it shows up in the differences of contracts that Kaoshi and Polymarket offers. Kaoshi also offers contracts related to SpaceX, to OpenAI, but these are contracts that are about which month OpenAI will announce their IPO or which investment bankers will hire. They're not exactly contracts on the valuations of OpenAI or SpaceX, which will make it more like securities.

17:05So it shows that for prediction markets operating in the U.S., they're limited in their ability to push out products that allow people to bet directly on the prices of these companies, whether it's public company or private companies. And as a result, they're limited in their ability to disrupt the U.S. stock market.

17:26Stephanie Palazzolo:So you actually then connecting us back to this discussion that we had with Michael Rodden before you came on, you know, the regulatory questions that predictions markets face are plentiful. And so, and by the way, this is not just in the US. This is outside of the US as well. He was telling us about the countries in Europe, for example, that have banned prediction markets. I mean, you've been covering crypto for quite a few years. Do you think that these products last, you know, insofar as prediction markets offering them? And I'm not just talking about the US, I'm talking about around the world.

18:02Stephanie Palazzolo:I mean, is there a reckoning coming where they will have to rein in these specific types of products that are tracking the stock market, private company valuations? How do you see it unfolding? Yeah, I think regulatory development will be a big metric that we'll be watching out for. Outside of the U.S., you start to see regulators in different countries to start to crack down on prediction markets. Some of them think these are unregistered gambling platforms and gambling is not legal in most countries. And even within the US, I mentioned that the way these contracts are phrased sometimes can run into potential legal uncertainty.

18:47And there's a huge gray area in terms of whether this contract is registered securities or not. For example, Cauchy allows people to bet on the quarterly car delivery numbers of Tesla. And that itself is not necessarily a bet on the earnings of Tesla or the stock price of Tesla. However, as we all know, investors watch the car delivery number very closely. This is a metric that could potentially affect their earnings and their stock prices so these are legal gray areas where uh we'll need to see what regulators say in terms of whether these are even allowed to be offered on prediction markets great well you actually i want

19:30Stephanie Palazzolo:to thank you for coming on that is you actually yang our crypto reporter here at the information a new report from it and customer service company freshworks suggests that ai in some ways could be making work more complicated rather than less, I want to bring on Freshworks CEO Dennis Woodside to unpack some more of the company's observations. Dennis, welcome to TITV. It's great to have you here. Hey, guys. Good to see you, and thanks for having me. So you guys put out a pretty interesting report today looking at the complexity tasks that have come up with AI. And look, there were a number of interesting stats in there.

20:08Stephanie Palazzolo:The line that jumped out to me that I want to get your color on here is you guys wrote that managing AI is now adding to the workload it was meant to reduce with teams fixing flawed outputs and governing tool sprawl across a growing stack of AI products. So this idea that things are getting much more complicated, not much less complicated. Did this surprise you in the survey that you did with IT leaders? You know, it really did. I mean, I talked to CIOs every week and the average CIO in a mid-market organization, think of a company with about 5 ,000 employees, they can have 20 or 30 different AI applications or elements of AI in existing applications that they're trying to manage and trying to deal with.

20:52And think about the governance tasks around that. Think about just training your teams to understand what all this actually could do for you. So with AI coming in, there's a huge amount of promise. There's a huge amount of upside from AI, but this complexity is real. And what we seek to do is to reduce that and to offer a product experience that's very well integrated with what they already are using for either their employee service operations, managing IT, or their customer support operations so that the AI is actually easier to use, faster to get up and running, and you get value from it much faster.

21:27Stephanie Palazzolo:So where is this complexity coming from? I mean, is this pressure from, you know, management saying, hey, we have to find a way to use these AI tools. You know, we are willing to spend. We've heard about token maxing, you know, the ways in which that's fluctuated, you know, in terms of appetite. But like, what is where is the complexity coming from? Is there people just not knowing how to use these tools? Well, put yourself in the shoes of a CIO. So they're getting pressure from above, from their CIO and their board to adopt AI, drive the efficiency that we're seeing others get from AI, improve our output, improve what we actually can deliver for our customers from AI.

22:14So that's coming from the top. And that's like a do something now type of imperative. And then they're getting pressure from the bottom where a lot of these AI tools, you can just go and sign up for Cloud Cowork or a number of these other products. So employees are saying, hey, I need something to do my job better. I don't want to be left behind. So I'm going to go out and use my credit card and buy whatever solution I can find. So that's tough for a CIO. And then all the vendors are coming in and saying, hey, our products now have AI as well. So I think it's coming in all directions. And we're in that messy, innovative space where there's so much going on that the CIOs have to manage all those things really well.

22:50It's a tough spot to be in. The best organizations really are taking a look at everything that's going on and focusing on what business outcomes are we trying to drive. Are we trying to reduce the time that our creative people spend on non-creative tasks? Are we trying to reduce costs outright? And they're creating real business plans with specific tools in mind for how they advance business goals. They're starting with the business goal. They're not starting with, hey, let's just do AI. Right.

23:18Stephanie Palazzolo:And so I just want to confirm then. So in terms of what your survey found, this is complexity for the IT leaders and the CIOs. This is not referring to workloads for the employees, you know, sort of the lower level employees and how they're. Well, that's hard, too. I mean, the survey specifically was of IT decision makers who are really in the middle of this AI revolution. But it's true that for employees as well, which tool do I use for what work for what use case? That's a challenge, too. Yeah. So where we're particularly focused is what we call the mid market and agile enterprises. And we think those companies in particular are really at risk.

23:58These aren't the supergiant corporations. They're 5 ,000-person companies, maybe up to 20 ,000-person companies. So think about New Balance, which is a customer of ours. They've got 7 ,000 employees. They compete against Nike, which has 90 ,000 employees. So for New Balance, they have to compete for the same shelf space, the same mind share, the same customer. They have to be much more nimble and agile. And this complexity potentially really hurts them. So they need to seek vendors and partners that are going to try to reduce that complexity. And that's what we do. That's what our products are designed to do.

24:30We've built AI into the products that they're already using. It's super easy to get up and running and use. And that's where the value really is.