Washington Fears Polymarket Bank Failure Contracts Could Spark Panic

Bank regulators and lawmakers have voiced apprehension over the presence of contracts on the Polymarket prediction platform, which pertain to the probability of bank collapses, according to a Sept. 25 Bloomberg report. These contracts are not permitted on Polymarket's U.S. exchange, which falls under the jurisdiction of the Commodity Futures Trading Commission.

The contracts have come under intense scrutiny due to fears that they could proliferate in scope, potentially sparking a bank run, encouraging unscrupulous actors to incite panic, and enabling insider trading, the report stated. Proponents of the contracts argue that they could serve as an early warning system against unfounded rumors, per the report.

Neal Kumar, Polymarket's Chief Legal Officer, commented to Bloomberg, "Bank bailouts and failures are among the most consequential events in America. Our markets aggregate information that is typically only accessible to the most sophisticated financial institutions, but through our prediction market, is now available to everyone."

Rival prediction market Kalshi does not offer contracts tied to specific bank failures, according to the report. Kalshi's spokesperson, Elisabeth Diana, stated that bank-failure contracts are "in poor taste." Prediction markets have gained notoriety for allowing users to wager on a wide range of subjects, from the price of bitcoin to the future president of the United States, as PYMNTS reported in December.

However, prediction markets have become a point of contention between federal and state regulators, each claiming regulatory authority. Supporters argue that prediction markets provide real-world utility by enabling the aggregation and pricing of collective beliefs during times of uncertainty, geopolitical unrest, rapid technological progress, and other destabilizing macroeconomic forces.

Some states have criticized prediction markets as illegal gambling operations because they meet the legal definition of gambling but fail to secure licenses from state gaming commissions. There have also been allegations that prediction markets might have facilitated insider trading related to the 2020 strike on Iran, though Kalshi's CEO disputed this claim, stating that war-related topics had already been prohibited in regulated markets.