A think tank says crypto is a major problem at the heart of prediction markets

• Well-timed bets in prediction markets have raised eyebrows in recent months.
• The timing of bets on major geopolitical events has led to heightened scrutiny of the market.
• The Center for American Progress says crypto's role in prediction markets hinders trust.

Prediction markets have exploded in popularity in recent years, and with the boom has come increased scrutiny on what people are betting on—and when they're betting.

The drama kicked off with a well-timed bet on the US military's arrest of Venezuelan President Nicholas Maduro in January. The Iran War this month has also produced a flood of available wagers on the conflict, leading to worries that insiders in government could be profiting from information before it goes public.

The Center for American Progress, a nonpartisan think tank, said in an analysis published on Wednesday that the use of crypto is weighing on public trust in prediction markets.

"According to blockchain analytics platform Bubblemaps, the Iranian attack bets were funded by digital wallets opened within 24 hours of the attack," it wrote. "Similarly, an anonymous Polymarket user placed a bet hours before the U.S. military capture of Maduro on January 3, predicting that he would be out of power by the end of the month."

Alexandra Thornton, the report's author and senior director of financial regulation at the CAP, spoke to Business Insider about how she sees crypto as problematic for prediction markets like Polymarket, which is a crypto-based betting site.

Thornton said that the problem, in her view, is the anonymity offered by crypto. The fact that users can place bets behind the veil of an online pseudonym made possible by blockchain makes it too easy for those with insider information to bet on events.

"Obviously we don't want crypto facilitating illicit activity, whether it is used to avoid sanctions or to make bets using inside government information, which is not proven, but what many people are concerned is happening," she said. "It's yet another way that anonymous crypto transactions can facilitate illicit activity."

Accusations of insider trading in prediction markets have surged this month, with social media awash in outraged comments about bettors who made money on the Iran war and the killing of Iran's Supreme Leader Ali Khamenei.

While Thornton said that the accusations of insider trading remain unproven as of now, she added that she thinks crypto could make it tempting for government insiders to take advantage of their non-public information.

In a January blog post, Polymarket profiled a trader who had used the Pentagon Pizza Index to time a successful bet on the Venezuela attacks. The indicator claims to be able to gauge the timing of military action by monitoring the late-night delivery of pizzas to the Pentagon. Thornton said she wasn't convinced by the explanation.

Polymarket did not respond to a request for comment.