Polymarket, a prediction market platform, is currently facing challenges as it is under investigation by the Department of Justice for allowing U.S. residents to trade on its platform despite a regulatory settlement prohibiting such activity. The platform blocks U.S. IP addresses, but legal experts suggest that this might not be enough to comply with U.S. regulations, especially for companies with a history of regulatory issues like Polymarket.
One of the main issues faced by Polymarket is the use of virtual private networks (VPNs) by users to circumvent geographical restrictions imposed by governments. This raises questions about how blockchain protocols and centralized crypto firms can effectively prevent users from restricted countries from accessing their services.
Recently, federal law enforcement raided the home of Shayne Coplan, Polymarket’s founder and CEO, although the exact reason for the raid is still unclear. The Department of Justice is conducting a criminal investigation into whether Polymarket allowed U.S. residents to trade on its platform in violation of a 2022 regulatory settlement.
Polymarket, founded in 2020, has been a successful platform in the crypto industry this year, with billions in trading volume and hundreds of millions in open interest. The platform allows users to bet on the outcomes of real-world events using USDC, a stablecoin that is pegged to the U.S. dollar.
While Polymarket has been blocking U.S. users with IP addresses, American traders have been using VPNs to access the platform. Unlike regulated financial intermediaries, Polymarket does not collect personal information from customers, making it difficult to verify the locations of its users.
To prevent users from restricted jurisdictions from accessing their services, companies like Polymarket may need to implement a know-your-customer (KYC) process, which requires users to share sensitive personal information. This process adds friction to the sign-up process but is considered more effective than simple IP address blocks.
Other strategies to mitigate risks include monitoring for users who attempt to access services using VPNs and clearly stating that products are not available to U.S. users. Regulators have cited screening IP addresses against known VPNs as an effective geofencing measure.
It is important for companies like Polymarket to comply with U.S. regulations, even if they are not based in the country. The effects of their business in the jurisdiction can still subject them to U.S. laws, and failing to comply could lead to legal consequences.
In conclusion, Polymarket’s challenges highlight the complexities faced by crypto firms in ensuring compliance with regulations and preventing users from restricted jurisdictions from accessing their services. Implementing robust geofencing measures and KYC processes are crucial steps for companies to take to avoid regulatory scrutiny and legal issues.
