Prediction Markets Face Crackdowns Amid Insider Trading and Regulatory Storms
If regulators fail to set up clear policies and rules around prediction markets, there could be another FTX-like implosion, according to Commodity Futures Trading Commission Chairman Michael Selig.
"The failure of agencies to actually regulate, to do their job and set policy, is such a disservice to the builders and innovators and everyday Americans who want to access these products," Selig said in an interview with Dastan President and Co-Founder Farokh Sarmad.
Prediction markets like Kalshi and Polymarket have exploded in popularity over the last year, moving from niche homes to political markets to massive platforms facilitating event contracts for nearly anything you could imagine-sports, weather, geopolitical issues, and more.
The surge in volumes, which now stretches above $20 billion monthly, has led to rapidly rising valuations as well, with Kalshi reportedly doubling its valuation earlier this month when it raised $1 billion at a $22 billion valuation.
Those surging values have not come without scrutiny. Kalshi and Polymarket have recently faced accusations of insider trading on their platforms, as public officials like California Governor Gavin Newsom allege that individuals close to the Trump administration have profited from insider knowledge using prediction markets.
More specific examples have led to a fine and suspension against a video editor for MrBeast, who profited from inside information related to the YouTube personality's videos. In February, two Israelis were arrested and charged with misusing classified information, having allegedly used military secrets to profit on Polymarket.
Recently, both offered new policies and procedures to try and address the insider trading concerns.
The platforms are also running into issues in the courts, where states are now pushing back on their offerings. For example, Arizona attorney general Kris Mayes filed 20 criminal charges against Kalshi, alleging the site is running an "illegal gambling operation."
Earlier this month, Nevada earned a victory in court over the platform, landing a temporary restraining order that banned it from offering its event contracts in the state. Other states, like Massachusetts, may not be far behind from doing the same.
Selig, who has previously condemned the behavior from states, didn't expect it.
"I am surprised about it," he told Sarmad about the state's lawsuits against prediction markets, adding that, "I think the jurisdiction of the agency is very clear."
The jurisdiction and regulation of prediction markets, as well as crypto and artificial intelligence and their relationship to derivative markets, is something that Selig said the agency is committed to getting right.
"We've got to make sure these exchanges come and register here in the United States and that our rules are set up to facilitate fair markets, markets that have investor protections, customer protections, and have real guardrails and rules," Selig added.
To do so, his agency has recently put out an Advanced Notice of Proposed Rulemaking to invite public comments and feedback about the rules necessary to properly regulate prediction markets.
Last week, the CFTC launched an Innovation Task Force to help create a clear regulatory framework for AI, crypto, and prediction markets as well, indicating it would coordinate with other federal agencies like the SEC and its Crypto Task Force on initiatives.
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