New Types of Information Laundering in Prediction Markets: How Secrets Integrate into Investment Signals

Author: Polyfactual

Compiled by: Hu Tao, ChainCatcher

In late February 2026, four anonymous wallets appeared on the Polymarket platform. These wallets were created just a few days prior and seemed very confident. In the following weeks, they placed over 80 bets on specific mechanisms of war between the U.S. and Iran, the timing of the first strike, the resignation of Iran's Supreme Leader, and the announcement of a ceasefire. When Bubblemaps eventually mapped this cluster of bets and linked the initial four wallets to five others, it was found that these nine associated accounts collectively won over $2.4 million in prizes, with a win rate of 98%, even though many of the bets were placed under lower probability conditions.

Now, this phenomenon has a name, or at least a category: information laundering. To understand why it is so destructive, one must first grasp the nature of predicting market prices, as the mechanisms that enable these markets to function are also what make them susceptible to exploitation.

Stripped of its crypto packaging, PM contracts are actually very simple. Each share earns $1 if the prediction is correct and earns nothing if incorrect. Since each binary question has only two outcomes, one "yes" share plus one "no" share always equals $1, so the price of a "yes" share at $0.36 indicates that the market believes the probability of that prediction being correct is 36%.

Crucially, Polymarket does not set these prices. They originate from a Central Limit Order Book (CLOB). The supply and demand between traders determine the prices, and the displayed price is at the midpoint of the bid-ask spread. This may be its brilliance. In this model, the price is not an opinion given by the betting company, but rather the collective expectations of all traders in the order book. When new information arises, such as a strong employment report or lower-than-expected CPI data, traders will reprice, and the prices will adjust accordingly. In fact, the market becomes a continuously updated probability estimate, for which financial institutions are willing to pay. Organizations like Bloomberg, Reuters, and hedge funds now purchase real-time access to Polymarket data interfaces, viewing them as quicker market sentiment indicators than traditional polls.

However, the trap is that a system designed to convert information into prices cannot distinguish between public information and stolen information. The order book does not ask where your advantage comes from; it only records that you bought in.

At this point, the term "laundering" seems apt. In traditional money laundering activities, dirty cash flows in from one end of the system, and clean, untraceable cash flows out from the other end. In information laundering activities, confidential information flows in from one end, and market prices flow out from the other end, with market prices leaving no trace.

For example, suppose someone knows that a strike will occur in 48 hours, while the current market price is 15%. Their buying pressure would consume all the sell orders in the order book and push the midpoint price higher, say to a contract price of 35%. To others, this merely looks like a normal repricing, as if some trader had made an accurate geopolitical judgment. This secret is cleverly packaged into a clear signal. When the strike occurs, the YES contract price will rise to $1. A position bought around $0.15 would yield a return of about 6.7 times. The Maduro case from a few months ago clearly demonstrated this scale. Prosecutors accused the army sergeant of turning a bet of about $34,000 into approximately $400,000.

The laundering metaphor also applies to obscuring the truth. Bubblemaps found that the losses of the Iranian crime group were minimal, only a few hundred dollars, which the company believes were intentionally incurred to mislead investigators. A 98% win rate seems extraordinary, and a 98% win rate combined with some trivial, intentionally incurred losses appears almost like a very skilled trader.

However, the most ironic aspect is that these markets are more transparent than traditional exchanges. Even if account holders remain anonymous, each transaction is at least recorded in a public system. It is this openness that allows analysts to use tools like Bubblemaps to reconstruct a conspiracy involving nine wallets based on temporal correlations and trading volumes, such as trades recorded days before the market changes on February 28.

But the same transparency also brings a secondary risk that deeply concerns regulators. If external analysts can interpret that a colluding group is heavily betting on an attack, then hostile forces can do the same. Hostile observers can detect unusual trades and formulate war plans and market predictions based on them. The unusual spikes that appear in certain war markets serve as a low-cost, deniable source of intelligence for anyone monitoring that chain. The launderers have cleansed their information, while as a byproduct, they have abstractly disseminated the original secret to the world.

Why can existing laws not simply cover this situation? Because traditional insider trading rules are formulated around stocks, significant non-public information related to companies, earnings, mergers, executive disclosures, etc., rather than around the timing of military actions. There is no "issuer" in war, nor are there corporate insiders in the legal sense.

Geographical factors of jurisdiction exacerbate this issue. U.S. federal law prohibits prediction markets from offering bets on war or assassination, but Maduro's bets were made on Polymarket's offshore site, which is not subject to these restrictions. Moreover, the entry barrier is laughably low; one can easily bypass U.S. bans with a VPN costing about $2 a month. A KYC-verified account can also be easily purchased. Nevertheless, Washington has finally taken notice of this issue. On May 22, the House Oversight Committee launched a formal investigation into prediction markets, demanding records on how they verify identities, enforce geographic restrictions, and handle suspicious transactions related to Venezuela and Iran. Proposed bills, the "Death Bet Act" and the "Financial Prediction Markets Public Integrity Act," aim to ban war bets and prohibit officials from trading on non-public information.

The harsh reality is that information laundering is not a man-made loophole in prediction markets, but a byproduct of their core operational mechanism. A market that can perfectly convert knowledge into prices inherently rewards those who possess the best information, including those who should not have access to that information. Without undermining the mechanisms that make these markets more accurate than polls, this loophole cannot be completely closed.

As the industry looks to the future, even if only 1-2% of derivatives traders adopt these tools, annual trading volume could reach $50 billion. The question is no longer whether prediction markets are effective, but whether they are too effective. The issue is whether a society can tolerate such a machine: one that transforms the most closely guarded secrets of society into publicly quoted, tradable numbers, and pays generous rewards to those who hold them.

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