Prediction Markets – Governance, Digital Economy & Financial Risks

Context

The rapid rise of online prediction platforms like Polymarket, where users bet on future outcomes, has raised concerns over online gambling, crypto use, regulatory gaps, and risks to vulnerable populations.

What Are Prediction Markets?

Prediction markets are digital platforms that allow people to bet on future events, converting uncertainty into tradable financial positions.

How Do Prediction Markets Work?

1. The platform lists a future event.
2. Users connect wallets or bank accounts (mostly crypto-based).
3. They purchase Yes or No shares.
4. Prices keep changing based on collective betting behaviour.
5. If the final result matches your position, you earn money; otherwise, you lose.

Most platforms operate using:

1. Blockchain technology
2. Cryptocurrencies and stablecoins (crypto pegged to assets like the US dollar)
3. VPN access in countries where services are restricted

Even though stablecoins reduce price volatility, they do not remove legal or ethical risks.

Why Prediction Markets Are Problematic?

These platforms raise serious policy concerns:

1. They effectively function as online betting systems.
2. Many listed events are highly speculative, with no productive economic value.
3. They promote financial gambling rather than real investment.
4. Crypto payments make monitoring and tracing difficult.
5. Easy digital access attracts people with low financial literacy, especially poorer groups hoping for quick gains.

Thus, instead of wealth creation, they encourage risk-taking behaviour and financial vulnerability.

Indian Legal Position

1. Constitutional Structure
   1. Betting and gambling fall under State List subjects.
   2. Online gaming rules differ across States.
   3. General principle: Games of chance are usually prohibited. Most prediction markets resemble games of chance, not skill.
   4. There is an ongoing debate on “game of skill vs game of chance.”
2. Financial Regulations
   1. Under FEMA provisions and rules of the Reserve Bank of India, using foreign exchange or cryptocurrencies for betting on overseas platforms is prohibited.
   2. Participation may invite scrutiny from RBI and enforcement agencies.
   3. At present, platforms like Polymarket operate in a legal grey zone, but tighter restrictions are expected.

Global Regulatory Position

Different countries have adopted stricter approaches:

1. United States – federally regulated, but many states impose bans
2. United Kingdom, Germany, and Singapore – prediction markets are banned or tightly controlled
3. India, however, still lacks a unified national framework.

Challenges and Way Forward

Conclusion

Prediction markets transform uncertainty into monetary bets and currently operate largely outside India’s regulatory system. While digital platforms can drive innovation, unchecked markets deepen financial insecurity and social risk.

FAQs

Q1. What are prediction markets? 

They are digital platforms like Polymarket where users bet on future events, turning uncertainty into tradable financial positions.

Q2. How do prediction markets work? 

Platforms list events, users buy “Yes” or “No” shares (often via cryptocurrencies), and payouts depend on the final outcome. Prices fluctuate based on collective betting behaviour.

Q3. Why are prediction markets considered problematic? 

They resemble online gambling, promote speculative risk-taking, use crypto payments that are hard to monitor, and can exploit vulnerable groups with low financial literacy.

Q4. What is India’s legal position on prediction markets? 

Betting and gambling fall under the State List. Most prediction markets are treated as games of chance and prohibited. Using foreign exchange or crypto for overseas betting violates FEMA.

Q5. How do other countries regulate prediction markets? 

The United States has federal oversight but state bans; the UK, Germany, and Singapore impose strict prohibitions. India lacks a unified national framework.