The recent probe into Polymarket highlights the long-standing compliance challenges faced by the crypto industry. At the core of the issue is the difficulty in preventing users from utilizing virtual private networks (VPNs) to bypass geographical restrictions imposed by governments. Polymarket, a crypto company that has seen significant success, is currently under investigation for allegedly allowing US residents to trade on its platform, despite being prohibited from doing so under a 2022 regulatory settlement.
The company has been blocking users with US IP addresses, but American traders have been using VPNs to disguise their locations and access the platform. This raises questions about what crypto companies can do to prevent users from accessing their services through VPNs and what regulators expect them to do. Experts suggest that implementing know-your-customer (KYC) processes can help, but this can add friction to the sign-up process and requires users to share sensitive personal information.
Other measures, such as strengthening IP address blocks, monitoring for VPN use, and clearly stating that services are not available to US users, can also be taken. However, it is an open question whether companies need to block all VPN use, and regulators have cited screening IP addresses against known VPNs as a positive factor for effective geofencing. The situation underscores the need for clarity on the legal obligations of crypto companies and the standards they are expected to meet to comply with regulations.