The online prediction market Polymarket has taken $77,507 worth of bets on whether major banks including HSBC and Lloyds Banking Group will fail by the end of this year, the Guardian reported on Friday. The US-owned platform, which hosts wagers on events ranging from football matches to military strikes, has allowed users to take positions on the collapse of the world's biggest lenders, including JP Morgan and BNP Paribas alongside the two British high-street banks.
Whilst residents of the UK, US, Canada and EU are banned from betting on the offshore platform, punters from roughly 150 other countries can monetarily benefit from events that would create financial instability and threaten entire economies. The Financial Conduct Authority told the Guardian it had been speaking to international regulators about prediction markets as part of efforts to protect market integrity.
Treasury committee member Bobby Dean, a Liberal Democrat MP, said UK authorities should intervene. He warned that if bank-related activity on the platform grew and a particular market escalated rapidly, it could trigger bank runs. Dean urged regulators to contact US counterparts to raise concerns, adding that the sector should not turn a blind eye to risks because they are relatively small today.
Concerns centre on insider trading and market manipulation by bad actors hoping to profit from online bets. The banking industry has already been told to prepare for social media-fuelled bank runs, where customers withdraw cash at speed. Silicon Valley Bank and Credit Suisse collapsed in 2023 after stock sell-offs and bank runs accelerated by speculation on platforms such as X and WhatsApp.
Polymarket's chief legal officer, Neal Kumar, defended the bets, arguing the company was democratising markets previously restricted to elite traders and institutions. He said banks and hedge funds have had access to credit default swap markets for years, and Polymarket provides a larger audience with information on bank failures whilst combating disinformation.
The European Securities and Markets Authority warned last month that prediction markets are rife with insider trading. Its risk report stated that market manipulation and insider trading risks reach new levels on platforms such as Polymarket, which operate with limited identity verification and where the platform may not know who is behind a wager. The authority cited cases including newly created wallets that reportedly generated $1.2m profits shortly before a US-Israel strike on Iran in February became public, and a US soldier criminally charged for allegedly using classified information to place profitable bets ahead of the US capture of Venezuela's leader in January.
Polymarket's offshore platform is built on a blockchain, with accounts linked to crypto wallets that can be publicly traced but are difficult to link to individuals. Some users from restricted countries can access the platform via virtual private networks, violating Polymarket's terms of use.
Why it matters for wealth
If prediction markets create incentives for bad actors to destabilise banks through manipulation or insider trading, depositors and shareholders face heightened systemic risk beyond traditional prudential oversight. The moral hazard of profiting from institutional failure may accelerate the very crises being wagered upon.
Watch whether UK or US regulators impose restrictions on prediction markets tied to systemically important financial institutions.
Source: The Guardian
Photo: Melvin Silva / Pexels
