> For the complete documentation index, see [llms.txt](https://vizo.gitbook.io/vizo-exchange-docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://vizo.gitbook.io/vizo-exchange-docs/documentation/compliance-and-risk/interactive-blocks.md). # 10. Compliance and Risk Control ## 10**.1 Compliance Challenges and Strategy** * **Core Risk Awareness**: Once US stocks are involved (Nasdaq, S\&P, individual stocks), it touches upon Securities Derivative / Gambling Regulation. In the US, such products could be classified as an Unregistered Derivatives Exchange, with extremely high risk. The reason Polymarket avoids stock markets is due to the strict regulation by the SEC and CFTC. * **Original Evasion Plan:** * **Geographic Restriction:** Servers and contracts are deployed in compliance-friendly regions, blocking US domestic users. * **Positioning as Entertainment / Prediction Market**: Emphasizing "prediction" rather than "investment trading". * **DAO Governance**: Handing over market generation and management to the community DAO to lower the compliance risk of the centralized operating party.
*** ## 10**.2 Regulatory Minefield in the US: The Jurisdictional Dispute between CFTC and SEC** * **Polymarket Precedent Defining "Swap"**: The CFTC's action against Polymarket in 2022 is a foundational case study. The CFTC ruled that Polymarket's event-based binary options (e.g., "Will the ETH price be higher than $X on date Y?") fall under the definition of a "Swap" in the Commodity Exchange Act (CEA). Since Polymarket was not registered as a Designated Contract Market (DCM) or a Swap Execution Facility (SEF), its operation was deemed illegal, resulting in a $1.4 million fine and a prohibition from offering services to US users. Polymarket's path back into the US market is through acquiring a licensed DCM—QCEX and obtaining a "no-action" letter, which indicates that the only way to operate in the US is to fully comply with the existing regulatory framework. * **SEC Obstacle Polystock Cannot Avoid**: The CFTC regulates swaps based on commodities (such as cryptocurrencies and broad-based indices), while the SEC regulates swaps based on securities (individual stocks, narrow-based indices). A market question posed by Polystock, such as "Will Nvidia's (NVDA) closing price fall between 170 and 172.50?", is a typical binary option and also a securities-based swap. Offering such a product without registering as a national securities exchange will directly violate the securities laws enforced by the SEC, and the severity should not be underestimated. Polymarket's explicit avoidance of stock-based markets is the strongest evidence of this risk. * **New Conflict in Federal and State-Level Regulation:** Even for federally compliant platforms like Kalshi, a new threat has emerged: state-level gambling commissions. Multiple states (such as New Jersey, Nevada, Illinois, etc.) have issued cease and desist orders, arguing that event contracts are essentially gambling as defined by state law, regardless of their CFTC status. This creates a complex compliance matrix where products must simultaneously satisfy the requirements of federal derivatives regulators and state gambling laws. * **A Ray of Hope SEC/CFTC Coordination:** A recent joint statement by the SEC and CFTC foreshadows a new era of cooperation and a willingness to provide regulatory clarity for innovative products. Crucially, they explicitly mentioned the need to provide "clarity for innovators who wish to responsibly list event contracts on prediction markets, including those based on securities".
*** ## 10**.3 International Launch Strategy: Seeking a Compliance Safe Harbor** * **European Union - MiCA/MiFID II Path:** The EU's Markets in Crypto-Assets Regulation (MiCA) has fully entered into force by the end of 2024, providing a unified framework for crypto-asset services in all 27 member states. Under MiCA, Polystock may need to obtain authorization as a Crypto-Asset Service Provider (CASP). This involves establishing a legal entity in an EU member state, meeting capital requirements, and adhering to strict governance and disclosure rules. Crucially, if prediction markets are deemed "financial instruments," they will be subject to the stricter Markets in Financial Instruments Directive II (MiFID II). Binary options based on stock prices will almost certainly be classified as financial instruments (specifically Contracts for Difference or Derivatives). Therefore, the EU provides a clear but complex and costly path to achieving regulatory legality. **Asian Hubs:** * Singapore: Known for its pragmatic but strict regulatory approach. The Monetary Authority of Singapore (MAS) regulates crypto businesses under the Payment Services Act (PSA). While cryptocurrency trading is legal, services resembling gambling are strictly restricted by the 2022 Gambling Control Act, and cryptocurrencies are explicitly prohibited from use in casinos. * Hong Kong: Actively positioning itself as a global crypto hub. The Securities and Futures Commission (SFC) enforces a mandatory licensing regime for Virtual Asset Service Providers (VASP). Crypto derivatives are considered complex financial products and are subject to strict regulation.
*** ## 10**.4 Global Regulatory Environment Comparison Matrix** | **Jurisdiction** | **Governing Laws/Framework** | **Primary Regulator** | **Possible Product Classification** | **Required Licenses** | **Key Risks and Considerations** | Strategic Advice | | ---------------- | ------------------------------------------------------- | -------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | | US | Commodity Exchange Act (CEA), Securities Exchange Act | CFTC, SEC, State Gambling Commissions | Commodity Swaps (Indices), Securities Swaps (Individual Stocks), Gambling (State Level) | DCM (CFTC), National Securities Exchange (SEC), State | Extremely high legal costs, SEC/CFTC dual risk, state gambling license. SEC obstacle is currently insurmountable. | Focus on non-securities assets. | | EU | MiCA, MiFID II | National Competent Authorities (e.g., BaFin, AMF), ESMA | Crypto-Assets, Financial Instruments (Derivatives) | CASP License (MiCA), Investment Firm License (MiFID II) | High compliance costs, complex process, requires physical presence in the EU. | Preferred Candidate. Offers a clear (though difficult) path to the vast unified market. | | Singapore | Payment Services Act (PSA), Gambling Control Act | Monetary Authority of Singapore (MAS), Gambling Regulatory Authority (GRA) | Digital Payment Tokens (DPT), Illegal Gambling | Main Payment Institution License | High risk of being classified as gambling. Strict Anti-Money Laundering/Counter-Terrorism Financing enforcement. | Secondary Candidate. Feasible, but the risk of gambling classification is significant. | | Hong Kong | VASP Licensing Regime, Securities and Futures Ordinance | Securities and Futures Commission (SFC) | Virtual Assets, Complex Financial Products | VASP License | Strict regulation, closely linked to traditional financial rules. | Strong Candidate. Has a clear VASP framework and a crypto-friendly government stance. | *** ## 10**.5 Risk Control and Anti-Cheating Mechanism** * **Multi-Account Detection**: Identifies malicious multi-opening based on device fingerprints and on-chain address graphs. * **Large Order Alert:** If a single bet exceeds 20% of the market pool's total amount, a risk control review is triggered. * **Anomaly Detection**: Uses an ML model to monitor betting frequency and amount distribution to identify arbitrage bots and cheating patterns. * **User Protection**: Provides self-limit features (daily/weekly betting limit, cool-off period lock).
*** ## 10**.6 Arbitration and DAO Governance Mechanism** * **Dispute Period:** If there is a price difference or data anomaly after market close, it enters a 24–72 hour dispute period. * **Voting Mechanism:** DAO members can vote based on staked tokens to arbitrate the final closing price. * **Arbitration Fees:** Paid by the insurance pool to ensure that users' principal and reward distribution are not affected. * **Transparency**: All arbitration processes, voting results, and data sources...
*** ## 10.7 Overview of South Korean Market Compliance ### 10**.7.1 Overview of South Korean Legal/Policy Environment** Virtual Asset Service Provider (VASP) and Crypto Asset Regulation South Korea has a legal framework to regulate entities like crypto exchanges and wallet services as VASPs. They must be registered and comply with KYC/AML regulations. The "Virtual Asset User Protection Act" (VAUPA) is being enforced, raising requirements for user protection, anti-fraud, and transparency. Gambling and Wagering Laws South Korean law imposes severe restrictions on gambling. Apart from specific state-licensed sports betting or official lotteries, other forms of "betting/wagering" are strictly controlled. For example, political event prediction markets are considered "illegal" gambling in South Korea. Restrictions on Trading Activities and Content Review Prediction/wagering activities offered by individuals or platforms, if deemed to be "gambling" in nature, may be considered illegal. The Korean Penal Code includes relevant articles (such as Article 246) for penalizing gambling activities. Taxation / Earnings Policies for capital gains tax on virtual assets are being developed, expected to be implemented before 2027. Users must use their real names, and transactions must comply with the real-name account system. Virtual asset trading platforms are supervised by the Financial Intelligence Unit (FIU). ### 10**.7.2 Market Type and Potential Violation Path Analysis** | **Feature / Scenario** | **Legal Risk Point** | **Possible Reason for Being Deemed Illegal** | | ----------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | | Betting on the closing price of a financial asset ("Yes/No" prediction) | Deemed as gambling / illegal wagering | Because users wager funds based on an "outcome" for a win/loss, similar in nature to speculation/gambling. | | Win/Loss settlement + Prize Pool distribution | Perspective of Financial Contract or Securities Trading | May be considered an unlicensed financial contract or securities derivative operation. | | Wager amount paid/exchanged using crypto or virtual assets | Must be a registered Virtual Asset Service Provider and comply with AML/KYC. | If not a legally registered platform, it may be blocked or fined. | | Community discussion + Follow Bet + Live Stream Recommendation | Promotion of gambling | If live streaming/recommendations lead users to place bets, it may be considered promotion of gambling. | ### 10**.7.3 Compliance Recommendations** | **Recommendation** | **Details** | | ---------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | Register as a Legal VASP |

Register or obtain a license in South Korea, comply with the real-name account system, and AML/KYC requirements.

Obtain legal opinions on finance, asset custody security standards, and local law compliance.

| | Geo-Blocking or Differentiated Version |

For Korean users, offer a restricted version: e.g., prohibit predictions on certain individual financial stocks, only allowing index or crypto asset predictions.

Provide disclaimers + risk warnings + user consent clauses.

| | Limit Winnings/Betting Amounts & Age/Identity Verification |

Age and identity verification to ensure minors cannot participate.

Set limits on single-user betting amounts + control liquidity in high-risk markets.

| | Legal Opinion and Insurance Mechanism |

Obtain a legal opinion from a local lawyer/compliance consultant before launch, clarifying which activities may be illegal.

Consider an insurance or arbitration mechanism to address user disputes or inquiries from local regulators.

| | Positioning and Copy are Crucial |

Emphasize the "prediction market / entertainment-type / non-gambling" nature. Clearly position the product as "prediction market entertainment" rather than gambling/securities.

Avoid using terms like "gambling," "wagering," "guaranteed betting profit," etc. Use terms like "prediction," "gamified prediction," "prediction participation."

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