Author: EX.IO Research Institute, Digital Asset FinTech Group
This is not the victory of a single platform, but another validation of an industry-wide pattern: all new tracks with real value—be they native innovations in crypto finance or other industries—will ultimately be incorporated into a regulatory framework. The only difference lies in whether they embrace it actively or are co-opted passively.
I. Prologue: When 'Liangshan Heroes' Meet Imperial Pardon
In Water Margin, Song Jiang leads the 108 heroes to gather at Liangshan Marsh, robbing the rich to aid the poor and acting as champions of justice, yet they always face an ultimate choice—continue being 'champions of justice' on the mountain, or accept an imperial pardon in exchange for a certificate of amnesty?
This thousand-year-old tale is now being precisely replicated in the crypto world.
In the second half of 2025, the decentralized prediction market platform Polymarket acquired the CFTC-licensed derivatives exchange QCX for $112 million[1][2], subsequently receiving a 'no-action' letter from the U.S. Commodity Futures Trading Commission (CFTC)[3]. This officially transformed it from a 'crypto-native platform in a gray zone' into a 'federally regulated financial institution.' This turnaround came just three and a half years after it was fined $1.4 million and expelled from the U.S. market by the CFTC in 2022[4].
Polymarket's 'road to pardon' precisely mirrors the complete metamorphosis of the entire crypto prediction market track from a 'rough, unregulated realm' to the 'hall of power.'
II. The 'Previous Life' of Prediction Markets: From Academic Experiment to Commercial Exploration
To understand Polymarket's story, one must return to the academic origins of prediction markets.
In 1988, three economists from the University of Iowa were complaining in an Iowa City bar—Jesse Jackson's unexpected win in the Michigan Democratic primary had caught all polling agencies off guard. They conceived a bold idea: if an 'election market' existed where participants could use real money to express their expectations of political outcomes, could prices reflect reality more accurately than polls?[5]
This idea gave birth to the Iowa Electronic Markets (IEM)[6], the pioneering work of modern prediction markets. IEM used real money (with a cap of $500 per trader) to trade contracts based on real events. Remarkably, between 1988 and 2004, IEM's prediction accuracy exceeded that of traditional polls over 74% of the time[6][7]. A comparative study of 964 polls and contemporaneous market prices showed that the absolute average error of polls was 3.37 percentage points, while market predictions were only 1.82 percentage points[5].
The success of IEM sparked a wave of commercialization. Around 2001, Ireland's InTrade and TradeSports were established, bringing prediction markets to the masses[8]. InTrade gained fame during the 2008 and 2012 U.S. presidential elections, with The New York Times citing its data 68 times in one year[9]. By the 2012 election, the platform had over 82,000 users, with wagers on that single election exceeding $200 million[10]. However, on November 26, 2012, the CFTC sued InTrade for 'offering option contracts to U.S. users without approval'[11], forcing the platform to shut down in March 2013[8][12]. In 2018, a federal court ordered InTrade to pay a $3 million civil penalty[8].
The downfall of InTrade left a profound lesson: in the U.S., prediction markets cannot end well unless they reconcile with the regulatory framework. Subsequently, in 2014, PredictIt obtained a CFTC 'no-action letter' exemption under the academic shelter of Victoria University of Wellington in New Zealand, but with a strict investment limit of only $850 per person per contract[13][14]. In August 2022, the CFTC revoked this exemption, and PredictIt chose to sue the regulator[9].
In the crypto world, Augur launched in 2018 as the first decentralized prediction market protocol based on Ethereum[15], proposing a vision of 'permissionless, on-chain trading.' However, constrained by Ethereum L1's high gas fees (single transaction costs could reach $5-50[15]) and extremely poor user experience (users needed to run their own Ethereum node), Augur's daily active users quickly plummeted from about 265 to fewer than 30 after launch[15].
The 'first half' of prediction markets thus paints a clear picture: academically effective, commercially frustrated, and regulatorily pressured. This track needed a disruptor that could solve both user experience issues and find a compliant path.
III. Polymarket's 'Rough Era': From Bathroom Startup to FBI Knock
In June 2020, 21-year-old NYU dropout Shayne Coplan set up a website in his apartment's 'makeshift bathroom office'[16][17]. At the time, the COVID-19 pandemic was sweeping the globe, and the world was full of uncertainty—when would a vaccine be available? When would lockdowns end? Who would win the presidential election? Coplan keenly realized that people needed a venue to distill 'uncertainty with diverse opinions' into 'tradable price signals.'
Polymarket was born. Unlike Augur, Coplan chose Polygon (an Ethereum L2) as the underlying infrastructure, reducing transaction costs to near zero[18]. Simultaneously, Polymarket adopted the USDC stablecoin for settlement and supported credit card deposits via MoonPay, greatly simplifying the user experience. These product design decisions allowed Polymarket to achieve a dimensional reduction in user experience compared to its predecessors.
During the 2020 U.S. presidential election, Polymarket's trading volume surged rapidly, reaching a single-day volume of $1.297 million on November 3[18]. The platform's accurate prediction of Biden's victory attracted attention from crypto thought leaders like Vitalik Buterin[19]. By 2021, Polymarket completed a $4 million seed round led by Polychain Capital, followed by a $25 million Series A round led by General Catalyst[20].
However, the strategy of 'build first, seek compliance later' faced severe backlash in 2022.
On January 3, 2022, the CFTC initiated an enforcement action against Polymarket, alleging it offered event-based binary option contracts to U.S. customers without being registered[4]. The CFTC determined that each 'Yes/No' event market on Polymarket essentially constituted a swap. Under the Commodity Exchange Act, such products could only be traded on registered exchanges or swap execution facilities[4]. CFTC Acting Director of Enforcement Vincent McGonagle emphasized in a statement: 'All derivatives markets must operate within the framework of the law, regardless of the technology used, including so-called decentralized finance.'[4]
Ultimately, Polymarket settled with the CFTC: paying a $1.4 million civil penalty, promising to shut down all non-compliant markets by January 14, 2022, and blocking all U.S. user access to the platform[4][21].
For Polymarket, the fine itself was not a fatal blow; the real cost was losing the world's largest financial market—the United States. Thereafter, Polymarket geo-blocked U.S. users, but according to Similarweb data, 25% of website traffic in 2024 still came from the U.S.[22], and users bypassing restrictions via VPNs and other methods was an open secret.
IV. The 2024 Election: The Peak and Darkest Hour of 'Holding the Mountain Fort'
Polymarket's true 'breakout' moment occurred during the 2024 U.S. presidential election.
In January 2024, Polymarket launched its '2024 U.S. Presidential Election Winner' market, quickly igniting a trading frenzy[20]. As the race intensified—Trump's assassination attempt, Biden's unexpected withdrawal—the platform's attention and trading volume grew exponentially. In November 2024, monthly trading volume reached a record high of $2.63 billion[23]; cumulative annual trading volume surpassed $9 billion, with active traders peaking at 314,500 in December[24]. Throughout the election cycle, total bets on the presidential election on Polymarket neared $3.7 billion[25].
More symbolically, Polymarket's prediction accuracy surpassed that of traditional polls. While most pollsters showed a tight race, Polymarket's platform price consistently showed Trump leading[16]. A French 'whale' trader reportedly bet tens of millions of dollars on the platform for a Trump victory, ultimately netting an alleged $85 million[16].
However, the peak moment was fleeting.
On November 13, 2024, in the early hours, FBI agents knocked on Coplan's door at his Manhattan, New York apartment, seizing his phone and electronic devices[26]. The U.S. Department of Justice and the CFTC jointly launched an investigation, with the core question being: Did Polymarket violate the 2022 settlement agreement by secretly accepting bets from U.S. users?[26]
Coplan himself was not arrested or charged. He responded on X in his signature Gen Z tone: 'New phone, who dis?'[17]—hinting his old phone had been confiscated. Polymarket issued a statement, calling the raid an 'obvious political retaliation by the outgoing administration'[27].
From 'holding the mountain fort' to 'imperial siege,' Polymarket's situation was remarkably similar to that of the Liangshan heroes—the greater the momentum, the more dangerous the attention it attracts.
V. The Road to Pardon: $112 Million for a 'Certificate of Amnesty'
The turning point came in July 2025.
With the Trump administration taking office, the U.S. cryptocurrency regulatory environment underwent a fundamental shift. On July 15, 2025, the U.S. Department of Justice and the CFTC simultaneously announced the termination of their investigation into Polymarket, bringing no charges or additional penalties[3].
Three days later, Polymarket dropped a 'bombshell': acquiring QCX LLC and its affiliated clearing agency QC Clearing LLC for $112 million[1][2]. QCX was a previously little-known entity whose founder, Sergei Dobrovolskii, had begun applying for a DCM (Designated Contract Market) license four years earlier and received formal CFTC approval on July 9, 2025[3]. Through this acquisition, Polymarket instantly obtained a complete CFTC exchange license and clearing license, bypassing the typically years-long independent application process.
Coplan announced in the acquisition announcement: 'Now, through the acquisition of QCX, we are laying the groundwork for Polymarket to return to the U.S. market—as a fully regulated and compliant platform that allows Americans to trade their views.'[1]
In September 2025, the CFTC issued a 'No-Action Letter' to Polymarket's newly acquired exchange division, giving it the green light to legally offer prediction market services in the U.S.[3]. In November 2025, the CFTC further issued a revised Designation Order, allowing Polymarket to operate a federally regulated matching trading platform in the U.S.[3].
Polymarket's 'pardon' strategy was masterful—rather than spending years applying for a license from scratch, it simply bought a ready-made 'certificate of amnesty.' In the crypto industry, this path of 'license acquisition via shell' is becoming the choice for more and more projects[28].
VI. Change at the Top: A Historic Reversal in Regulatory Attitude
Polymarket's successful 'pardon' was inseparable from the 'court's' own change in attitude.
In May 2024, during the Biden administration, the CFTC voted 3-2 to pass a proposal seeking to ban event contracts related to elections, sporting events, or awards competitions[29]. Then-CFTC Chair Rostin Behnam warned that allowing such contracts would put the CFTC in the role of an 'election police'[30].
However, in February 2026, new CFTC Chair Michael S. Selig announced the formal withdrawal of that proposal[31]. Selig stated bluntly in the announcement: 'The 2024 event contract proposal reflected the previous administration's hasty regulatory decision to impose a blanket ban on political contracts ahead of a presidential election.'[31]
Almost simultaneously, SEC Chair Paul Atkins, in testimony before the Senate Banking Committee on February 12, 2026, stated that prediction markets might fall under the 'overlapping jurisdiction' of the SEC and CFTC, and claimed, 'I think we have sufficient authority' to regulate certain products of prediction markets[32][33]. Atkins noted: 'Prediction markets are exactly the kind of area where there may be overlapping jurisdiction; this is an important issue we are highly focused on.'[34]
Even more symbolically, in February 2026, the CFTC announced the formation of an Industry Advisory Committee (IAC), with both Polymarket CEO Shayne Coplan and Kalshi CEO Tarek Mansour appointed as members[35]. This appointment was interpreted by outsiders as a symbolic move by the CFTC to 'pardon' the prediction market industry in an institutionalized manner.
The 180-degree turn in regulatory attitude provided the indispensable political soil for Polymarket's compliance transformation.
VII. From 'Championing Justice' to 'Seeking Official Rank': Revelations
Polymarket's 'pardon' story provides a profound compliance revelation for the entire crypto industry.
First, real value is the bargaining chip. The core reason Polymarket could go from being fined and expelled to being incorporated was that it proved the information aggregation value of prediction markets. In 2025, the entire prediction market industry's trading volume reached $63.5 billion, more than quadrupling from 2023[34][33]. NYSE parent ICE announced plans in October 2025 to invest up to $2 billion in Polymarket (at a valuation of approximately $9 billion)[25], becoming its exclusive institutional data distributor[36]. In March 2026, ICE completed the final $600 million tranche of this investment commitment[37]. What ICE values is the application potential of Polymarket's event-driven data in the institutional investment space.
Second, there is more than one path to compliance. Kalshi chose the 'frontal assault'—founders Luana Lopes Lara and Tarek Mansour, after graduating from MIT, spent nearly three years in repeated communication with the CFTC, becoming the first event contract exchange to receive a CFTC DCM license in November 2020[38]. Polymarket took the shortcut of 'reverse merger'—acquiring an existing licensed entity for $112 million[1]. Both paths lead to the same destination, confirming the feasibility of integrating crypto-native innovation with traditional financial regulatory frameworks.
Third, 'pardon' does not equal 'disarmament.' After obtaining the CFTC license, Polymarket still retained its crypto-native DNA—on-chain settlement, USDC denomination, global liquidity. It is no longer an 'outlaw on Liangshan Marsh,' but nor has it become a 'compliant subject in the court.' This posture of 'dancing in shackles' might be the most realistic survival strategy for the crypto industry in the age of regulation.
Epilogue
At the end of Water Margin, Song Jiang leads the Liangshan heroes to accept the pardon, fighting campaigns north and south, only to meet a tragic end of 'the hounds are killed once the hares are gone.' But Polymarket's story may not repeat this tragedy—because the prediction market it represents has already transformed from an 'interesting crypto toy' into financial infrastructure recognized by mainstream institutions like the NYSE, CNN, and Bridgewater[25][36].
When the CFTC's No-Action Letter and ICE's $2 billion check are both on the table, when the SEC Chair and CFTC Chair discuss jurisdictional归属 of prediction markets on Capitol Hill, this industry is no longer a 'gray gambling game.'
This is the first chapter of the crypto market writing its compliance revelation—and Polymarket is precisely the 'Song Jiang' who was pardoned first.
References
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