Prediction Markets Under Fire: Insider Trading, Sports Bets, and Political Storms Ahead

News Analysis

What to know:

Prediction markets have quickly become popular, and now U.S. lawmakers are responding with new laws aimed at preventing misuse. These laws might not be fully effective immediately, but changing political attitudes could give them more support and momentum in the future.

Polymarket and Kalshi are the most popular platforms for event-based contracts, but companies like Coinbase and Crypto.com, as well as traditional gambling sites, are now joining the market. According to TRM Labs, activity in this area has grown dramatically, jumping from $1.2 billion per month in early 2025 to over $20 billion annually by the following year. Bets on politics are the most popular, with sports contracts coming in second.

As a crypto investor, I’m seeing some really interesting new betting opportunities pop up. It’s not just about traditional sports anymore! People are now able to bet on all sorts of things – like what Donald Trump might say in a speech, when a new album will drop, how much a billionaire’s net worth will change in a month, or even which baseball team will win their league. It’s a whole new world of prediction markets, and it’s pretty fascinating.

Many state and federal officials believe that popular sports bets are increasingly resembling illegal gambling rather than legitimate financial trading. Others worry that some of these bets – particularly those involving sensitive topics like war or political events – are unethical and could be manipulated by people with inside information.

Over the past few weeks, there’s been growing concern in Washington about suspicious betting activity. State officials have raised legal questions, and lawmakers have been alerted by cases where bettors appeared to predict military attacks before they happened. This has led to more than six bills being proposed in Congress, with support from both Democrats and Republicans.

• STOP Corrupt Bets Act: A cross-chamber bill from two Democrats — Senator Jeff Merkley of Oregon and Representative Jamie Raskin from Maryland — would ban a wide swath of event contracts. The legislation introduced last week would entirely halt bets on elections, most government actions, sports and military actions.
• Public Integrity in Financial Prediction Markets Act: A possibly more potent Senate bill because of its bipartisan backing, this one would prohibit election officials and employees of the government from betting on anything they have inside knowledge of. The bill — authored by four senators, including Republicans John Curtis of Utah and Todd Young of Indiana — was a response to suspicious bets on the war in Iran, and it would extend its ban to the president, vice president, cabinet members and congressional lawmakers. A similar one from another two Senate Democrats is the End Prediction Market Corruption Act and from a bipartisan pair of House members is the Preventing Real-time Exploitation and Deceptive Insider Congressional Trading Act (PREDICT Act).
• Banning Event Trading on Sensitive Operations and Federal Functions (BETS OFF) Act: On the same theme, this piece of legislation responds to wagers on Iran and Venezuela military actions that may have demonstrated prior knowledge. Backed by Democrats in the Senate and House, it also bans trades from those who know the outcome of matters including government action, terrorism, war, assassination and other events the bettors have prior awareness of.
• The Prediction Markets Are Gambling Act: This bill stops prediction markets from activity that resembles sports betting. Introduced by two senators who also backed the Public Integrity Act, Senators Adam Schiff, a California Democrat, and John Curtis, the Utah Republican, the legislation supports the efforts from state gambling regulators to keep sports event contracts within the states’ jurisdiction.
• Prediction Markets Security and Integrity Act: The legislation from Democratic Senators Richard Blumenthal of Connecticut and Andy Kim of New Jersey focuses on preventing insider trading and market manipulation, but it also demands age verification for those betting and bans trades on war, death and military action.

As President Trump’s second term went on, the Republican Party became less popular, giving Democrats a good chance to win back control of the House of Representatives. Betting markets like Polymarket suggest there’s an 85% probability of this happening. Democrats also have a nearly equal chance of winning the Senate, according to Kalshi. If these efforts succeed, Democrats could gain more momentum after the elections.

Even if a bill managing prediction markets were to pass Congress next year, it would still require President Trump’s signature. His son, Don Jr., advises both Kalshi and Polymarket, and a firm he’s connected to has invested in Polymarket. The Trump family also has a financial connection to the prediction platform Myriad through their stake in World Liberty Financial Inc., which Myriad uses for settlements. Furthermore, President Trump has publicly stated he believes prediction markets are more accurate than traditional polls when forecasting election results.

This industry shares many similarities with the cryptocurrency world, using blockchain technology for contracts and digital tokens for transactions. As a result, supporters and government officials often discuss these innovations together. Former President Trump prioritized boosting the cryptocurrency industry during his time in office.

War with the states

The industry might be able to rely on the White House to block any moves by Congress. However, states aren’t facing the same restrictions and are actively challenging prediction markets in court.

If you bet $100 on the University of Michigan basketball team to win their next March Madness game on a sportsbook like BetMGM, you could win around $80 to $90 extra if they do. You could make a similar bet with a nearly identical payout on Kalshi. Now, some state regulators are taking Kalshi to court, arguing that these bets and Kalshi’s contracts on the same game are both forms of gambling.

As an analyst following these cases, I’m seeing a constant influx of new lawsuits. From my perspective, and speaking with colleagues like Liz Davis – formerly a chief trial attorney at the CFTC and now at Davis Wright Tremaine – we all anticipate the final decision on where these cases can be heard will ultimately rest with the Supreme Court.

According to Jake Preiserowicz, a former lawyer for the CFTC now with McDermott, Will & Schulte, this issue is likely headed for the Supreme Court, though it could take up to two years to get there. Until then, he warns it’s a very risky situation.

A Nevada court has stopped Kalshi from operating, and other states, including Washington and Arizona, are taking similar action. Arizona’s attorney general has even filed criminal charges against Kalshi, accusing the company of running an illegal gambling operation centered around election betting.

Mick Mulvaney, who previously served as chief of staff under President Trump, is now supporting states’ rights in a debate over online prediction markets. He’s launched a new group, the Gambling Is Not Investing Coalition, to oppose the industry’s push to be regulated as financial derivatives at the federal level.

The company argues that if something appears and operates like gambling, it should be regulated as such, and that states and tribal governments are best suited to oversee it, according to its website.

Following accusations from Washington state, Elisabeth Diana, Kalshi’s communications director, explained to CoinDesk that her company is a nationally regulated exchange for events happening in the real world, and falls under the sole authority of federal regulators.

This is quite different from the services provided by traditional, state-regulated sportsbooks and casinos,” she explained. “We strongly believe our approach is legally sound.

Friend at the CFTC

Mike Selig, the head of the Commodity Futures Trading Commission, which oversees the derivatives market, has been actively arguing that his agency, not state governments, has the power to regulate prediction markets. He’s made this a key focus of his work, even filing a legal document in court to assert the CFTC’s authority over these types of contracts and to challenge what he sees as overreach by the states.

He stated that this move disregards established legal principles and past practices. His agency has been developing new rules for prediction markets and recently reached an unusual agreement with Major League Baseball to share information.

Selig, the regulator responsible for overseeing Kalshi and Polymarket, also pointed to recent enforcement actions taken by Kalshi itself, indicating the company is actively working to prevent fraud and market manipulation.

Kalshi took action against two people suspected of cheating on its platform. They suspended and fined a producer connected to the Mr. Beast show for wagering on events within the show, and a political candidate for betting on their own chances of winning the California governor’s race.

As a crypto investor, I noticed Polymarket recently updated its rules to make things clearer. Basically, they’re saying you can’t trade on inside information – stuff you shouldn’t have gotten because of your job or position. And they’re also banning anyone who could actually *affect* the outcome of a bet from trading on it. It’s all about keeping the market fair and honest.

Federal prosecutors have also reportedly been asking prediction market companies if any specific situations might involve illegal insider trading.

Inside trades?

Analysis from TRM suggests some individuals with inside knowledge may have profited from bets placed on the recent U.S. attack on Iran. On Polymarket, a prediction market, the question of whether the U.S. would strike Iran by February 28, 2026, saw a surge in activity, becoming the platform’s most popular market with $73 million traded. TRM identified four digital wallets that accurately predicted the strike, placing approximately $40,000 in winning bets that ultimately yielded $872,000 in profits.

According to a recent report by TRM, four wallets with little prior activity suddenly began making bets around the same time, predicting a U.S. strike on Iran. While not conclusive proof of illegal activity, these wallets were all funded through the same source within a short timeframe, and they all stopped being used after the bets paid out.

If Trump administration officials are found to have bet on the outcomes of military operations, it could give more support to efforts to regulate prediction markets.

The two biggest companies that run prediction markets didn’t respond when asked about the recent wave of related bills in Congress.

According to Preiserowicz, the future is uncertain for many of these individuals. Some seem unlikely to progress, while others have a slightly better chance, but overall, the outcome remains unclear.

Even as Congress considers what to do, the CFTC has begun the official process of creating new rules and is asking for public feedback. Usually, this process takes a couple of years, but because Commissioner Selig is currently the only member of the five-person commission, he can move forward quickly without needing to consult with colleagues.

Preiserowicz estimated that the agency could finish a final rule before the year is out.

To prevent potential issues with insider trading, Davis mentioned that some clients are starting to consider whether they need stricter confidentiality rules to clearly define who within their organizations will have access to sensitive betting information.

According to Davis, the CFTC is developing rules for this space, and platforms are working to build in safeguards for users. She believes, similar to the cryptocurrency industry, that prediction markets will continue to expand and become more established with traditional institutions.

Kalshi is running a public awareness campaign in Washington, D.C., on streets and in transit stations, highlighting its strict rules against market manipulation, particularly insider trading. Their ads state they prohibit this practice because they are a federally regulated U.S. exchange. However, despite Kalshi’s efforts to emphasize these policies, government officials are now starting to independently address the issue.

California Governor Gavin Newsom is enacting a rule to prevent state officials from using confidential information to profit from prediction markets. This policy aims to stop them from trading on topics where they have non-public knowledge.

As a researcher following ethical guidelines in Washington, I’ve been observing Representative Seth Moulton’s proactive approach. He’s a Democrat from Massachusetts, and he’s taken matters into his own hands by prohibiting his staff from participating in prediction markets if those markets cover issues they might deal with in their work. He’s doing this independently, rather than waiting for a law to be passed.

Last week, he released a statement saying his office will not participate in dealings that violate the principles of honest and public service. He pledged to maintain high ethical standards for himself and his team, and urged all elected officials to do the same.

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2026-03-31 15:08