The anonymity protecting Polymarket's millions of users enables serious market manipulation that regulated competitors must prevent. A Columbia University study estimates wash trading accounted for 60 per cent of total trading volume at the crypto-based prediction market in December 2024. Researchers identified this volume manipulation involving colluding counterparties operating multiple wallets.

The risks extend beyond wash trading. An American soldier involved in Nicolás Maduro's capture was recently arrested after allegedly making over $400,000 in bets on the timing of his removal from power. Sophisticated actors using chain-hopping and mixer services would be far harder to identify. The presence of potential insiders changes trading incentives, with tools like "Insider Finder" developed to mimic their behavior.

Polymarket's main operation was exiled from the US in 2022 but now seeks regulatory approval to return. The Genius Act imposed KYC compliance on payment stablecoin issuers—regulators should apply the same logic here. Three approaches exist: direct platform-level verification, requiring crypto transfers through approved KYC-compliant issuers, or privacy-preserving digital certificates that confirm identity without revealing it to the platform.

Prediction markets can serve an important function by aggregating dispersed information and leveraging the wisdom of crowds. But their promise will not be fully realised without building trust—which requires knowing exactly who is trading.