Prediction markets face insider trading concerns as US states weigh tighter rules

Prediction markets are drawing scrutiny after several high-profile bets raised fears of insider trading. News followers use these online markets to wager on real events. Regulators and states are questioning if the platforms are legal exchanges. Others say they are gambling sites in disguise. The debate now includes possible bans and tighter controls.

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Recent incidents added pressure because outsiders cannot see who makes winning trades. That lack of visibility fuels claims that some bets use non-public information. "There has been very much a laissez-faire attitude toward the industry,\" said Richard Warr, professor of finance at NC State University. \"Regulation always takes time to catch up.\"

Prediction markets face state regulation and gambling claims

Federal officials say prediction markets fall under the Commodity Futures Trading Commission. They argue these contracts resemble derivatives used for risk hedging. Several states reject that view and say state gambling laws still apply. New York state attorney general Letitia James sued Coinbase and Gemini over alleged illegal gambling businesses.

\"Gambling by another name is still gambling,\" Letitia James said after the lawsuit. \"It is not exempt from regulation.\" Opposition has also been strong in states like California and Texas. Officials say users there use prediction markets to sidestep sports betting bans. That fight has made the CFTCs position more contested.

Republican Gov. Spencer Cox of Utah criticised the federal approach in February. \"I dont remember the CFTC having authority over the derivative market of LeBron James rebounds,\" Cox wrote online. Cox also said Cox would use every resource to block the market. Congress is also pushing for more oversight of sensitive contracts.

Lawmakers in both parties have raised concerns about markets tied to war and killings. They also cited bets on assassinations, terrorist attacks and a persons death. Federal law already lets the CFTC block some event contracts. Still, some lawmakers want an outright ban instead of selective limits.

\"There is no justification for gambling on lives,\" said Democratic Sen. Adam Schiff last month. Schiff also warned that war wagers could signal intentions to US enemies. That, Schiff said, creates national security risks. These concerns grew after large bets predicted a ceasefire announcement with Iran.

Polymarket and Kalshi set different prediction markets rules

Two companies dominate the sector, but they run in different ways. Polymarket operates mainly outside the US and uses crypto-currencies to settle bets. That system lets customers use pseudonyms and stay anonymous to other users. Critics say anonymity can attract insiders, though accounts still require verification.

Kalshi has operated as a US-regulated exchange since 2020. Kalshi requires customers to show ID and keeps real names on the back end. Kalshi also follows Know Your Customer rules to deter money laundering. Elisabeth Diana, a Kalshi spokesperson, said, \"Not all prediction markets are the same.\"

Diana added, \"We support Congress and regulators taking action to police insider trading.\" Kalshi has tried to present itself as stricter than rivals. Polymarket earlier faced a US ban after the Biden administration said Polymarket was not complying with regulations. Both firms have faced new questions after recent headlines.

Prediction markets and insider trading allegations drive new bans

Allegations resurfaced this past week after an arrest linked to Polymarket trading. An army special operations soldier was accused of using inside information. The bets came before the capture of former Venezuelan leader Nicolas Maduro. Polymarket said Polymarket alerted federal authorities about suspicious activity on the account.

Polymarket CEO Shayne Coplan wrote on X, \"We flagged this, referred it, and cooperated throughout the process,\" Coplan posted on X. Coplan added, \"This happens constantly behind the scenes, despite what many are led to believe.\" It was unclear if customers saw this as strong policing or overstretch.

Kalshi said the same soldier had tried to place a related bet on Kalshi. Kalshi said the trader was rejected after failing checks. The soldier was identified as Gannon Ken Van Dyke. Kalshi said Van Dyke netted $400,000 on trades elsewhere. \"Unlike competitors whose trading activity is mostly offshore and unregulated, we ban and police insider trading and dont allow war markets,\" a Kalshi spokesperson told the AP.

Other cases have involved soldiers and politicians. Israeli authorities arrested two soldiers earlier this year. The allegations involved secret information tied to operations against Iran last year. On Wednesday, Kalshi said three candidates running for federal office had wagered on their own races.

The candidates included one Senate candidate in Virginia and two congressional hopefuls. The other candidates were from Texas and Minnesota. Kalshi said Kalshi fined them and banned them for five years. Kalshi also said Kalshi would bar candidates from trading on their own campaigns going forward.

Kalshi said Kalshi would also block people tied to sports from trading related contracts. That included athletes and staff in college and professional sport. Polymarket also updated rules on confidential information. Polymarket said users cannot trade where they may hold confidential information or influence outcomes.

Trump links raise prediction markets conflict questions

The industrys growth could affect the Trump family because of business ties. Donald Trump Jr. has a stake in Polymarket through a venture capital fund. Donald Trump Jr. is also an adviser to Polymarket and Kalshi. The Trump business behind Truth Social also planned a market called Truth Predict.

Donald Trump has not made a clear policy commitment on regulation. Donald Trump has however sounded more critical in recent comments. \"I was never much in favour, and I dont like it conceptually, but it is what it is,\" Donald Trump said Thursday. \"Now, I think that Im not happy with any of that stuff.\"

As states sue and Congress weighs limits, prediction markets face a tightening spotlight. Different rules across venues have led to uneven safeguards and fresh controversy. Companies are rewriting policies and issuing bans after arrests and candidate trades. For now, the debate remains centred on transparency, insider risks, and who should regulate these bets.

With inputs from PTI