Author: Lawyer Liu Zhengyao

Introduction

Recently, prediction markets represented by Polymarket have gained significant popularity, with some players in China reportedly entering the market and even making profits. As a lawyer in the Web3 field, friends have asked me whether Polymarket is safe to engage with and whether there are legal risks related to gambling. This article aims to analyze these questions.

1. What are prediction markets and Polymarket?

(1) Prediction Markets

A "prediction market" can be simply understood as a platform that allows users to predict future events that have not yet occurred and to place bets and trade on them.

Prediction markets are not a new concept or gameplay. As early as 2014, there was a political (or policy) prediction platform called Predictit; in 2015, Augur, based on the Ethereum public chain, became one of the earliest decentralized prediction market platforms; and in the same year, Gnosis, another decentralized platform deployed on the blockchain, emerged. However, due to the immaturity of the early market, these platforms did not grow significantly and thus did not enter the relatively "mainstream" public view.

(2) Introduction to Polymarket

Polymarket is a prediction market platform deployed on a blockchain network (specifically the Polygon chain, a type of public chain). Users can "bet/predict" on future events (such as political elections, legislative outcomes, sports competitions, cultural events, etc.) by buying and selling "contract shares" that represent the probability of a certain outcome occurring. The platform's basic information is as follows: 1. Established in 2020, headquartered in New York, USA; 2. One of the "largest prediction markets in the world"; 3. Transactions are conducted using cryptocurrencies/stablecoins (such as USDC) on the blockchain.

(Image source: Screenshot from Polymarket's official website)

(3) The Operating Mechanism of Polymarket

Let’s illustrate how Polymarket operates with a simple example:

1. Choose a market (event). For example, "Will the X bill pass into law in 2026?" or "Will Haruki Murakami win the Nobel Prize in Literature?"

2. Buy and sell "shares." In this market, you can buy shares of an option (e.g., "yes" or "no"), with prices typically ranging from $0 to $1, similar to probabilities; a higher price indicates that the market believes the option is more likely to occur.

3. You can buy or sell before the event outcome is determined. If you buy an option early and, as new information emerges, the market views its probability favorably, the price may rise, allowing you to sell for a profit. Some see it as a mix of "betting + trading."

4. Settlement occurs once the event outcome is confirmed. If the outcome is true, those who bought shares of the "will happen" option receive corresponding returns; if false, they may incur losses. The entire process is executed transparently through smart contracts on the blockchain, eliminating the possibility of human intervention.

5. Blockchain/stablecoin operation. Polymarket operates on the Polygon chain (an Ethereum Layer 2 solution) and trades using the USDC stablecoin, facilitating global participation, transparency, and fairness.

2. Are Prediction Markets Gambling?

This is a common concern among many players, especially those in China. Although blockchain can decentralize, users on the blockchain network belong to their respective countries, which have corresponding jurisdictional laws. For Chinese citizens, based on the principle of nationality, if a crime is committed, they can still be held accountable under domestic criminal law even if physically overseas. Therefore, it is crucial to assess whether prediction markets pose criminal risks.

(1) Gambling Crimes under Chinese Criminal Law

Gambling, according to the definition by Professor Zhang Mingkai, a leading figure in criminal law, "refers to the act of engaging in gambling or games of chance for the purpose of winning or losing money" (Zhang Mingkai, "Criminal Law," 6th Edition, Law Press, p. 1414). "Winning or losing by chance" means that the outcome cannot be predicted or controlled by human intervention and depends on random factors. Chinese criminal law defines three gambling-related offenses: gambling crime, operating a gambling house, and organizing or participating in gambling abroad. The first two offenses are more commonly encountered in practice.

Gambling crime requires a profit motive, gathering people to gamble or engaging in gambling as a profession; operating a gambling house primarily punishes the act of providing a venue, space, or gambling tools, setting gambling methods or rules, organizing or controlling gambling activities, and conducting gambling operations.

To analyze whether prediction markets constitute gambling crimes under Chinese criminal law, we can refer to the criteria established in the "Opinions on Several Issues Concerning the Application of Law in Handling Online Gambling Crimes" issued by the "Two Highs and One Ministry" on August 31, 2010.

(2) Does Polymarket Constitute Gambling Crime under Chinese Law?

For Polymarket, its model constitutes gambling under Chinese law.

Firstly, Polymarket allows users to predict uncertain future events and place bets (buying or adding shares) on them, which falls under the category of "winning or losing by chance" in Chinese law.

Secondly, users place bets using real property. Virtual currencies, especially stablecoins like USDT and USDC, have been recognized by judicial authorities in mainland China for their property attributes in criminal cases. Therefore, even if users place bets using USDC, it still qualifies as "gambling with property" under Chinese criminal law theory.

Finally, gambling must also meet the condition of "having wins and losses." In Polymarket, those who bet correctly profit, while those who bet incorrectly incur losses, which fully meets the aforementioned condition.

Thus, we can conclude that the gameplay of Polymarket is classified as gambling under Chinese law without any obstacles. However, to determine whether it constitutes gambling crime or operating a gambling house crime, one must consider the aforementioned judicial interpretations and departmental regulations (such as the "Provisions on the Standards for Filing and Prosecution of Criminal Cases under the Jurisdiction of Public Security Organs (I)"). For example:

1. For gambling crimes, one of the following must be met:

(1) Organizing gambling with more than three people, with a total profit exceeding 5,000 yuan; (2) Organizing gambling with more than three people, with a total gambling amount exceeding 50,000 yuan; (3) Organizing gambling with more than three people, with a total of more than 20 participants; (4) Organizing more than ten citizens of the People's Republic of China to gamble abroad and receiving kickbacks or referral fees.

2. For operating a gambling house, one of the following must be met:

(1) Establishing a gambling website and accepting bets; (2) Establishing a gambling website and providing it to others for organizing gambling; (3) Acting as an agent for a gambling website and accepting bets; (4) Participating in profit-sharing from a gambling website.

For aggravated circumstances of operating a gambling house (such as a total gambling amount reaching over 300,000 yuan or a total of 120 participants), you can refer to the provisions in the aforementioned judicial interpretation. Lawyer Liu will not elaborate further.

For users of Polymarket in mainland China, it is especially important to pay attention to the criteria for "gambling crime" to avoid criminal risks. Additionally, individuals or institutions in mainland China that provide promotional support, operational support, or payment channels for the platform also face corresponding criminal risks.

3. Are There Other Legal Risks for Chinese Users of Prediction Markets?

In fact, statistically speaking, most people will not encounter real criminal legal risks in their lifetime, which leads some to mistakenly believe that if others are fine, how could it possibly happen to them? However, as a criminal lawyer, I advise everyone not to touch the legal "high-voltage line" (criminal law). Besides criminal risks, due to the nature of the Polymarket platform, there may also be the following risks in China:

(1) Administrative Legal Risks

As is well known, in China, if gambling does not constitute a crime, it still faces administrative risks of public security penalties. Article 82 of the "Public Security Administration Punishment Law" states: "For the purpose of profit, providing conditions for gambling, or participating in gambling with a large amount of gambling funds, shall be detained for less than 5 days or fined less than 1,000 yuan; if the circumstances are serious, shall be detained for more than 10 days but less than 15 days and fined more than 1,000 yuan but less than 5,000 yuan."

(2) Political Risks

Even if there are no risks of gambling crimes or violations of administrative laws, Chinese users need to be cautious about another legal risk: the risk of illegal or criminal behavior arising from political risks. Specifically, it is prohibited to mock political figures in mainland China (except for foreign political figures), but betting on political figures or events on the Polymarket platform is unlikely to be tolerated by mainland Chinese law.

4. Conclusion

From a positively optimistic global Web3 perspective, the highlight of prediction markets represented by Polymarket lies in their real-time, global, and decentralized (or partially decentralized) characteristics, making them a financial tool for "predicting the future." However, from a conservative perspective, Polymarket also has many features that require cautious consideration in terms of law, regulation, technology, and liquidity, which friends must take seriously and manage. //End

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