The Financial Conduct Authority is under mounting pressure to intervene after revelations that Polymarket, the US-owned prediction platform, has facilitated more than $77,000 in bets on whether HSBC and Lloyds Banking Group will collapse before the end of the year. The wagers sit alongside positions on the failure of JP Morgan, BNP Paribas and other systemically important institutions, raising acute questions about market integrity and the potential for manipulation to spill over into real-world financial instability.
While British, American, Canadian and EU residents are technically barred from Polymarket’s offshore platform, the restriction is easily circumvented. Users from roughly 150 other jurisdictions can freely speculate on the demise of banks that underpin the UK economy, creating what Liberal Democrat MP Bobby Dean describes as a “clear and present danger” to financial stability.
A shadow market in bank failure
Polymarket operates on a blockchain infrastructure that allows users to connect crypto wallets and place bets anonymously. The platform has grown rapidly since its launch, offering markets on everything from sports results and celebrity gossip to geopolitical events and, increasingly, the solvency of major financial institutions. As of this week, the combined open interest on contracts tied to the failure of global systemically important banks (G-SIBs) stood at $77,507 (£58,530).
That figure may appear modest against the trillions in assets held by HSBC or Lloyds. But regulators and academics warn that prediction markets do not need high volume to distort sentiment. A sudden spike in betting on a bank’s collapse can be amplified by social media, triggering deposit flight before fundamentals deteriorate.
The mechanism is straightforward. A trader with a large short position in a bank’s shares — or credit default swaps tied to its debt — could buy “yes” contracts on Polymarket, then leak or amplify the resulting price surge as evidence of insider concern. The platform’s pseudonymous architecture makes such coordination difficult to detect.
Regulatory alarm bells ring in London and Brussels
The FCA confirmed it has been engaging with international counterparts on the risks posed by prediction markets, citing its mandate to protect market integrity. The watchdog stopped short of announcing specific enforcement action against Polymarket, which operates outside UK jurisdiction. But the acknowledgement marks a shift in tone from passive monitoring to active coordination.
In its latest bi-annual risk report, the European Securities and Markets Authority (ESMA) went further. The regulator warned that “a growing number of incidents illustrates that prediction markets are rife with inside trading,” highlighting the particular dangers of distributed ledger technology (DLT) platforms where identity verification is minimal and the operator may not know who is behind a given wager.
ESMA cited three recent episodes. In February, newly created wallets reportedly netted $1.2 million betting on a US-Israel strike on Iran before the operation became public. In January, a US soldier was charged with using classified information to profit from bets on the capture of Venezuela’s Nicolás Maduro. In April, French police were alerted to suspected tampering with weather sensors at Charles de Gaulle airport that fed data into Polymarket contracts.
The moral hazard argument
Critics argue these platforms create perverse incentives. Professor Emilios Avgouleas, chair of international banking law at the University of Edinburgh, says prediction markets on bank failure introduce a “serious moral hazard” by giving participants a financial incentive to engineer the very outcomes they are betting on.
“This is not merely speculation,” Avgouleas said. “It is a contract that pays out when a bank fails. If you hold a large position, you have a direct financial interest in spreading rumours, shorting the stock, or even coordinating a run. The platform becomes a tool for financial sabotage.”
Polymarket rejects this framing. Neal Kumar, the company’s chief legal officer, argues the platform democratises access to information previously confined to institutional players. “Banks, hedge funds and credit professionals have had access to credit default swap markets for years,” he said. “You shouldn’t need to work at an institution like that to have access to information on a topic of this importance like bank failures. Polymarket simplifies the question, providing a much larger audience with information, and markets serve as a powerful source of information and combating disinformation.”
The defence echoes arguments made by prediction market advocates for decades: that price discovery serves a public good. But the comparison to credit default swaps (CDS) is imperfect. CDS markets are regulated, centrally cleared, and participants are known. Polymarket offers none of those safeguards.
VPNs and the porous border
The platform’s geo-blocking is, by design, porous. Users in restricted jurisdictions routinely access Polymarket via virtual private networks (VPNs), a violation of the site’s terms of service that the company does little to enforce in practice. Blockchain analytics firms have traced significant volume from UK and US IP ranges despite the ban.
This raises a jurisdictional dilemma. If British users are betting on British banks through an offshore platform, UK regulators have limited direct leverage. The FCA could pressure internet service providers to block the domain, or pursue action against UK-based affiliates and promoters. But the decentralised nature of the underlying blockchain — Polymarket settles on Polygon, an Ethereum sidechain — means the markets themselves cannot be easily shut down.
Dean, who sits on the Treasury Committee, wants a coordinated transatlantic response. “I would urge our regulators to get in contact with their counterparts in the US to raise concerns,” he said. “We should not turn a blind eye to the risks because they are relatively small today. We’ve all seen how quickly things can move in this sector.”
The Bank of England declined to comment on Polymarket specifically but said its supervisors “engage regularly with companies on a wide range of market developments and emerging risks.” HSBC and Lloyds also declined to comment. The Treasury did not respond to requests for comment.
The social media accelerant
The concern is not theoretical. The collapses of Silicon Valley Bank and Credit Suisse in 2023 demonstrated how quickly deposit flight can accelerate when speculation migrates from trading floors to WhatsApp groups and X (formerly Twitter). In both cases, unrealised losses on bond portfolios were known for months. What changed was the velocity of information — and misinformation — spreading through unregulated channels.
Polymarket adds a financial layer to that dynamic. A rising price on a “bank failure” contract becomes a citable data point, a veneer of market wisdom that can be screenshot and shared. The platform’s own dashboard displays probabilities in real time: “HSBC to fail by Dec 31, 2026 — 4%.” To a retail depositor, that looks like a forecast. To a manipulator, it looks like a target.
Why it Matters
The sums wagered on Polymarket are currently tiny relative to the institutions targeted. But the structural risk is disproportionate: an unregulated, pseudonymous platform now publishes real-time “probabilities” of bank failure that can be weaponised as misinformation, amplified by social media, and exploited by actors with conflicting financial interests. British regulators cannot police the blockchain, but they can — and must — treat these markets as a vector for systemic risk, coordinating with US and EU counterparts to disrupt the feedback loop between anonymous speculation and real-world financial panic before the next crisis hits.
