I get asked this question at least once every few months by clients and potential clients and have about 6 pretty exhaustive RFQs in my email right now.
Disclosure - In 2025, I had a pretty complex bot trading 15m markets. The bot did well for about 50 days, then some changes were announced and I lost the edge. A few months later, I lost about 50% of what I made through the bot in a single market that I (and many others believe) was just wrongly by their stupid oracle.
Anyways, not to digress and please don't take this as me discouraging you.
I have researched this in a pretty thorough manner and I'll try and copy paste from my client emails without revealing too much. Some as recent as last week.
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First things first, your friend was "overselling". Or they have no idea about Polymarket and their 2022 troubles.
There is a reason why Polymarket is walled for US citizens and that they have to use VPNs to get in their account.
For one, while true that CFTC (Commodities Future Trading Commission) doesn't consider prediction markets as gambling houses. However, here is the second part of that sentence - according to the same CFTC - prediction markets are derivative markets. And every single market is an "event contract".
This means that every rule applicable to derivative market applies to prediction markets and this includes the mega "insider trading law" and the fact that they have to be registered as a designated market.
Source -
https://www.financemagnates.com/fin...-not-gambling-and-insider-trading-laws-apply/
Since you used Polymarket as the base example, Polymarket got in trouble for not being a "Designated Contract Market".
As part of the settlement, Polymarket paid $1.4 million and ceased operations in US (and unregulated markets in general)
https://www.blockchainandthelaw.com...inary-options-operator-using-smart-contracts/
Now comign to your questions. The supposed "No oversight if we use USDC only".
Well last month the SEC and the CFTC issued a joint statement, specifically to address this crypto only loophole
https://www.ballardspahr.com/insigh...hen-digital-assets-are-and-are-not-securities
Rules are being made as I write this email and by the time your product hits the market, you will potentially have a ton to lose
https://www.freshfields.com/en/our-...insider-trading-on-prediction-markets-102mp8l
You have CFTC/SEC in the US, MiCA ( Markets in Crypto-Assets) in the EU and many other emerging regulations around the world.
I am from India, so I can also share another tidbit. .
India used to have Probo.in - it was a Prediction Market in it's most raw, most nuanced form. No blockchain, no smart contracts. You deposited INR and instantly had your wallet reflect the payment. You made your trades. Like Polymarket rounds to a dollar. Probo ran trades around INR 10. If you won you withdrew and it used India's UPI system to have the balance in your account in about 3 seconds.
It was pretty popular, had pretty much all the features of Polymarket. Had tons of markets. A running BTC, ETH hourly market.
Then the Indian government introduced, PROGA aka Promotion and Regulation of Online Gaming Act, 2025
This wasn't done to target Probo specifically, this was done because a ton of fantasy leagues had started popping up and Indians were getting addicted.
Now the Probo website reads - In light of PROGA, Probo is closed for business.
The point is, the issues keep mounting up until the regulators have to step in. And when they do, they almost always over reach.
Just this month, a US Soldier was in the news for making about $400k on the Venezuelan invasion. It was through and through insider trading, as he was involved in the execution.
https://www.cnbc.com/2026/04/23/doj-soldier-polymarket-bets-venezuela-maduro.html
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Anyways, back to the topic.
All of the above was the regulatory end of things. Now let's move to the operations bit.
First things first, yes there are market maker firms like GSR & Wintermute that can help with initial liquidity. But they're by no means cheap, they have upfront fees and they also have ironclad deals that could leave you with a fee share in perpetuity (even when you don't need them anymore).
Second is the more obvious one that you've mentioned. Using bots to boost initial liquidity. There is a term for this - "Wash trading". It is proper market manipulation by any meaning of the word and (if am not wrong) a felony in most regulated markets.
Finally, there are real actual operational challenges to deal with. A decent liquidity incentive program like Polymarket offers via Clob -
https://docs.polymarket.com/market-makers/liquidity-rewards
Or you need an Automated Market maker (Augur/Gnosis styled).
You also need to ensure your order book (CLOB styled) or your AMM is secured against arbitrage bots.
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All of this is still very cursory and is mostly me jumping between my Gmail app and BHW. (You caught me while travelling on a Saturday evening)
It's definitely possible to build a prediction market. But Polymarket has succeeded because of the First movers advantage. Everyone knows most of its userbase is from the US. Even the regulators do. So they exist in a legally grey area right now. A situation that can change overnight.
Polymarket is also banned in France, Switzerland, Poland, Singapore, Romania, Portugal, Bulgaria and Australia (all of this is on their Wikipedia page)
Hope that helps in someway.
P.S - Written on my phone while in the back of a moving car. Please excuse typos and brevity.
