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Prediction Markets Face Regulatory Battles and Insider Trading Concerns Amid Rapid Growth

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The Prediction Market Boom: Billions in Wagers, Legal Battles, and Insider Trading Allegations

The prediction market industry has experienced significant expansion, with platforms like Kalshi and Polymarket processing billions of dollars in weekly wagers on outcomes ranging from sports and elections to military actions and geopolitical events. This growth has sparked legal battles between federal and state regulators over jurisdiction, as well as congressional scrutiny over instances of alleged insider trading involving non-public information.

Monthly turnover increased from under $100 million before the 2024 U.S. presidential election to over $13 billion.

Key Developments

  • Multiple federal and state legal actions are underway to determine whether prediction markets are financial derivatives under federal jurisdiction or gambling operations subject to state law.
  • Congressional lawmakers have introduced bipartisan bills to ban or restrict certain types of prediction market bets.
  • Investigations have identified several instances of traders profiting from well-timed bets preceding major geopolitical events.
  • The Commodity Futures Trading Commission (CFTC) has asserted exclusive federal authority over prediction markets.

Regulatory and Legal Landscape

Federal vs. State Authority

The CFTC, led by Chairman Michael Selig, has filed lawsuits against Connecticut, Arizona, and Illinois, maintaining that prediction markets fall under exclusive federal jurisdiction as "swaps" or derivatives contracts. The agency has also filed an amicus brief supporting Kalshi in a Nevada case. Selig stated the commission "will continue to safeguard its exclusive regulatory authority over these markets and defend market participants against overzealous state regulators."

In response, Connecticut Attorney General William Tong characterized the federal government's position as "recycling industry arguments" that have been rejected in district courts, asserting the contracts constitute "unlicensed illegal gambling under time-worn state law."

Court Rulings

  • The 3rd U.S. Circuit Court of Appeals ruled that the CFTC has exclusive jurisdiction over Kalshi's sports-related event contracts in New Jersey, marking the first federal appeals court decision on the jurisdictional question.
  • A Nevada judge issued a temporary restraining order against Kalshi, determining the platform operated a "sports pool" under Nevada gaming law.
  • Court rulings in Maryland and Massachusetts have concluded that Kalshi wagers constitute games, while a D.C. federal court determined election betting does not constitute "gaming" in the same manner as poker or slot machines.

State Actions

  • Minnesota Governor Tim Walz signed the first state-level ban on prediction markets, making it a crime to host, advertise, or facilitate these platforms within the state, effective August 2025.
  • Arizona filed criminal charges against Kalshi, alleging operation of an illegal gambling business — the first criminal charges against the company.
  • Massachusetts obtained a preliminary injunction barring Kalshi from offering sports contracts without a state license.
  • New Hampshire State Senator Tim Lang plans to introduce legislation allowing the state to sue prediction market companies.
  • At least seven other states have introduced bills to crack down on prediction markets.

Proposed Legislation

Several bipartisan bills have been introduced in Congress:

  • Senators Todd Young (R-Ind.) and Elissa Slotkin (D-Mich.) introduced a bill to bar federal employees from using non-public information to bet on prediction markets.
  • Senators Adam Schiff (D-Calif.) and John Curtis (R-Utah) proposed a measure to ban sports prediction market contracts.
  • Senators Jeff Merkley (D-Ore.), Elizabeth Warren (D-Mass.), and Representative Jamie Raskin (D-Md.) introduced the STOP Corrupt Bets Act, proposing bans on bets related to elections, government actions, war, and sports.
  • Senator Chris Murphy (D-Conn.) announced plans to introduce legislation targeting profiting from war through prediction markets.
  • Representative Richie Torres (D-N.Y.) introduced a bill banning campaign staffers from betting on their own candidates using insider information.

Insider Trading Allegations

Analytics firms, researchers, and journalists have documented multiple instances of traders making significant profits on prediction markets in circumstances that have raised questions about potential use of non-public information.

Biden Pardon Bets

An analysis by the analytics firm Bubblemaps, shared with NPR, identified a Polymarket trader who made approximately $316,346 in profit from bets on five pardons issued by President Joe Biden. The trader placed bets totaling around $64,000 on pre-emptive pardons for Jim Biden, Liz Cheney, Adam Schiff, and Adam Kinzinger, as well as a separate bet on a pardon for Hunter Biden.

Bubblemaps investigators identified two accounts with a perfect record on these bets, linked by a shared cryptocurrency wallet on the Kraken exchange. Columbia Law School professor Joshua Mitts, who advises the Department of Justice on insider trading cases, stated the odds of this trading pattern occurring by random chance are "virtually zero."

Military and Geopolitical Bets

Multiple instances of well-timed bets on military actions have been documented:

  • Nine linked Polymarket accounts accumulated over $2.4 million in profits from bets on U.S. military actions in Iran, with a 98% win rate across more than 80 bets, according to data analytics firm Bubblemaps.
  • An anonymous trader profited over $400,000 from bets on the capture of Venezuelan leader Nicolás Maduro, placed hours before the U.S. operation.
  • A Polymarket account under the username "Magamyman" made over $553,000 after betting on Iran's Supreme Leader Ayatollah Ali Khamenei being out of power, prior to his death in an Israeli strike.
  • At least 50 new accounts placed substantial bets on a U.S.-Iran ceasefire hours before President Trump announced it on social media, according to the Associated Press.
  • Oil futures trades worth $800 million were placed minutes before President Trump announced productive talks with Iran.
  • A Harvard University paper estimated $143 million in profits on Polymarket may have been made by individuals with potential insider information across various events.

Government and Campaign Insider Trading

  • A campaign staffer working on a statewide campaign in the South told NPR they placed bets on prediction markets using non-public polling data, making thousands of dollars by buying low-cost event contracts before unreleased polls became public.
  • U.S. Army Master Sgt. Gannon Ken Van Dyke was indicted for allegedly using classified information to win bets on a special operations mission; he pleaded not guilty.
  • A U.S. soldier was charged with using classified information to bet on the removal of Venezuelan leader Nicolás Maduro, winning over $400,000.
  • Israeli authorities arrested several individuals and indicted two on suspicion of using classified military information to place bets on Polymarket, including bets related to an Israeli strike on Iran.
  • The Department of Justice and CFTC are investigating former U.S. Representative George Santos for alleged insider trading on Kalshi related to bets on his attendance at President Trump's State of the Union address.

Industry Operations and Growth

Platform Information

Prediction markets allow participants to buy and sell "event contracts" whose prices reflect the perceived probability (0% to 100%) of an event occurring.

Polymarket operates primarily as an overseas exchange using cryptocurrency, accessible in the U.S. via virtual private network (VPN). The platform was banned from the U.S. in 2022 after a settlement with regulators but is seeking to re-enter the U.S. market by acquiring a CFTC-licensed exchange. Shayne Coplan is the CEO.

Kalshi is regulated by the CFTC as a designated contract market and requires user identification. The company was co-founded by Tarek Mansour and Luana Lopes Lour. Kalshi has announced partnerships with CNN and CNBC.

Market Size

  • Monthly turnover increased from under $100 million before the 2024 U.S. presidential election to over $13 billion.
  • Kalshi reported over $2 billion in weekly trading volume and projected revenues of $600-700 million.
  • Kalshi raised $1 billion in December 2025, achieving an $11 billion valuation.
  • More than $1 billion has been wagered on military outcomes on prediction markets in 2025.
  • The investment firm Bernstein projects the industry could become a $1 trillion market within four years.

Political Connections

  • Donald Trump Jr. serves as a strategic advisor to both Kalshi and Polymarket, and his venture capital firm 1789 Capital has invested in Polymarket.
  • Truth Social, associated with President Trump, announced plans to launch its own prediction market, Truth Predict.
  • The CFTC established an Innovation Advisory Committee that includes CEOs from Polymarket, Kalshi, Coinbase, Robinhood, FanDuel, and DraftKings.
  • Brian Quintenz, a former CFTC Commissioner, serves as an early board member for Kalshi.

Responses from Companies

  • Polymarket stated it has "comprehensive market integrity infrastructure" and refers suspicious activity to law enforcement. The company has expressed willingness to collaborate with sports leagues.
  • Kalshi reported conducting over 200 investigations in the past year, freezing accounts, and referring cases to law enforcement. The company stated it does not allow markets directly tied to death and has issued refunds for markets related to Ayatollah Khamenei's status.
  • Kalshi suspended an editor for YouTube creator MrBeast and reported him to the CFTC for alleged insider trading, fining him $20,000 and issuing a two-year suspension.
  • Kalshi CEO Tarek Mansour stated the company supports congressional and regulatory action to police insider trading.