Prediction markets are becoming one of blockchain’s fastest-growing use cases, with Polymarket as their brightest star. The platform’s weekly trading volume now ranges between $755m and $1.2bn, according to Token Terminal, while speculation continues around a potential POLY token launch and an upcoming Polymarket USD stablecoin designed to replace the platform’s bridged collateral token. A recent Reuters report also revealed that Polymarket is in talks to raise $400m at a valuation of roughly $15bn.

Yet the sector’s rapid growth is increasingly colliding with allegations of insider trading and mounting political scrutiny. Is Polymarket facing a structural problem, or simply the growing pains of a new financial market?

A $2.4m insider-trading scandal

On May 18, CBS News reported that nine connected Polymarket accounts earned more than $2.4m by betting almost exclusively on US military actions. Blockchain analytics firm Bubblemaps identified the wallets as one of the clearest suspected cases of insider trading yet seen on blockchain-based prediction markets. The accounts reportedly placed successful wagers around key events in the Iran conflict, including US strikes, the removal of Iran’s supreme leader and the announcement of a ceasefire. Across more than 80 bets, the wallets achieved a 98%-win rate, often entering positions when implied probabilities remained low.

Another high-profile case involved US Army Master Sgt. Gannon Ken Van Dyke, accused of using non-public information to bet on a US operation targeting former Venezuelan leader Nicolás Maduro. The US prohibits making military bets on platforms like Polymarket US, but it's easy for users to find workarounds, such as VPNs, and use the global version of the platform. Prosecutors allege Van Dyke placed roughly $34,000 in wagers, including several the day before the raid on January 3, ultimately profiting by more than $400,000 before attempting to delete his Polymarket account. He pleaded not guilty to federal charges last month.

Political and military bets become a concern

According to a recent report by the Anti-Corruption Data Collective, political markets represent just 4% of total Polymarket markets but account for more than 36% of total trading volume. Markets tied to military, executive branch or central bank decisions generated roughly $8bn in trading volume.

The report also found unusually successful “longshot” bets — defined as wagers of at least $2,500 placed at implied probabilities below 35%. While only 14% of longshot trades succeeded across all markets, the success rate rose to 25% in political markets and reached 52% in military and defence-related markets. Researchers also observed spikes in successful longshot betting during the final 12 hours before market resolution.

Oil trades, being closely related to politics, have also sparked federal scrutiny. According to WSJ, trading data from financial firm LSEG showed that more than $800m was wagered on falling oil prices at 6:50 a.m. ET on March 23, shortly before President Donald Trump posted on Truth Social that negotiations with Iran were progressing positively. Oil prices subsequently fell more than 10%. 

Investigators are reportedly examining whether the trades involved non-public information. No charges have been filed.

Political backlash intensifies

In March, Democratic lawmakers introduced the Banning Event Trading on Sensitive Operations and Federal Functions Act, or BETS OFF Act, which would prohibit prediction markets tied to terrorism, assassinations, wars and certain government actions. Sen. Chris Murphy and Rep. Greg Casar argued that such markets risk turning politics and military operations into a casino benefiting insiders. Specifically, Murphy called out wagers that foresaw the U.S. striking Iran weeks ago, suggesting their lucrative timing on Polymarket was informed by people tied to the Trump administration. 

The BETS OFF legislation would ban wagers on events whose outcomes are controlled by government action or known in advance by a small group of individuals. It also targets entities that facilitate such markets, potentially restricting offshore operators serving US users. 

Additional pressure followed last week when Rep. Mike Levin and Sen. Adam Schiff introduced the DEATH BETS Act, another proposal targeting war-related prediction markets. 

At the same time, the Commodity Futures Trading Commission moved in the opposite direction by easing compliance requirements for event-contract operators. On May 13, the agency issued a no-action letter allowing prediction-market platforms to use simplified reporting rules typically reserved for futures contracts rather than more complex swap documentation.

The regulatory battle is also becoming international. At the end of April, Brazil’s Finance Ministry blocked access to prediction-market platforms, arguing they violated national betting regulations and posed risks to household savings.

For Polymarket and other prediction markets, the challenge is becoming increasingly clear. With the sector’s growth attracting both popular interest and regulatory scrutiny, platforms are forced to navigate a narrow path between rapid expansion and tighter oversight. On April 30, Polymarket announced a partnership with analytics firm Chainalysis to deploy blockchain-based surveillance tools aimed at detecting insider trading and improving compliance enforcement. The partnership includes investigative tools, on-chain threat detection systems and analytics models designed to identify suspicious betting behavior associated with insider knowledge. Whether that will be enough to convince investors of a $15bn valuation remains an open question.