Prediction markets under pressure to crack down on rogue bettors and stop insider trading

NEW YORK (AP) — A soldier betting on an operation to oust Venezuela's leader. Politicians gambling on their own elections. Massive bets on the president announcing a ceasefire with Iran right before he actually did.

Are prediction markets safe places for news junkies to bet on events — or dens of insider trading?

A lot is at stake as states vow to heavily regulate or even ban what they view as illegal gambling operations. Even the Trump family could be impacted as it lays plans to open its own prediction market.

Just how fair prediction markets are now depends partly on the trading venue. They all have different internal policies and different rules, though recent headlines suggest they are all going through adolescent growing pains — and the adults are worried.

Part of the problem is no one on the outside can tell who exactly is placing the winning bets, fueling suspicion some participants are trading on non-public information and triggering demands for Washington to crack down.

“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.”

Polymarket versus Kalshi

They're the two dominant players in the industry but approach the business differently.

Polymarket operates primarily outside the U.S. and gives the impression of being a no-holds-barred wild child. It was even banned for a time from operating in the U.S. after the Biden administration ruled it wasn’t complying with regulations.

Polymarket uses cryptocurrencies to settle bets, allowing customers to use pseudonyms and remain anonymous. Critics say that encourages people with inside information to take a chance, though experts note that Polymarket should know who such people are from when the accounts and payments were verified.

Kalshi has been a U.S.-regulated exchange since 2020. By contrast, it requires its customers to show ID and so knows all their names on the back end, though it is shields their identities from other bettors on its site. And since it operates onshore, it also has to follow U.S. “Know Your Customer” rules to make sure money launderers and other assorted crooks are not using its market for criminal activities.

In the competition for customers, Kalshi is seeking to portray itself as the responsible, clean actor.

“Not all prediction markets are the same," said Kalshi spokesperson Elisabeth Diana as calls grew for a crackdown earlier this month following the ceasefire bets. She added, “We support Congress and regulators taking action to police insider trading."

Capturing Maduro, and making a killing

The latest news of alleged insider trading came this past week after the arrest of an army special operations soldier accused of using inside information to bet in Polymarket before the capture of former Venezuelan leader Nicolas Maduro.

Polymarket emphasized that it had alerted federal authorities that something was awry with the soldier's account, though it's not clear whether customers view this as evidence the company is a good policeman or just overwhelmed by too many bad actors. “We flagged this, referred it, and cooperated throughout the process," Polymarket CEO Shayne Coplan posted on X. “This happens constantly behind the scenes, despite what many are led to believe.”

Kalshi took a different take and seized upon the news to say the same soldier — Gannon Ken Van Dyke, who had netted $400,000 on his trades — had tried to make a Maduro bet earlier on Kalshi but didn't pass muster and was turned down.

“Unlike competitors whose trading activity is mostly offshore and unregulated, we ban and police insider trading and don’t allow war markets," a Kalshi spokesperson told the AP.

Israeli soldiers, and congressmen

Earlier this year, Israeli authorities arrested two soldiers for allegedly trading on secret information on its country's operations against Iran last year among other things.

On Wednesday, Kalshi announced that three politicians running for federal office had gambled on their own elections. The candidates, one running for the Senate in Virginia and two congressional hopefuls from Texas and Minnesota, were fined and banned from Kalshi for five years.

The industry is scrambling to clean things up.

Last month, Kalshi said it would ban political candidates from trading on their own campaigns, and it would preemptively block anyone involved in college or professional sports from trading contracts related to the sports they play or are employed by.

Polymarket also recently rewrote its rules to say clearly that users cannot trade on contracts where they might possess confidential information or could influence the outcome of an event.

State crackdown

The federal government maintains that oversight belongs to one of its agencies, the Commodity Futures Trading Commission, and prediction markets are not under the purview of state gambling laws. After all, it argues, the CFTC already oversees financial derivatives sold by banks to companies as a hedge against risks, and these prediction market bets are similar.

Some states fervently dismiss that argument.

“Gambling by another name is still gambling,” said New York state attorney general Letitia James after suing two new players — Coinbase and Gemini — for allegedly operating illegal gambling businesses. “It is not exempt from regulation.” In big states like California and Texas where bettors are using the markets to get around sports betting bans, the pushback to the CFTC's support for prediction markets has been especially fierce. “I don’t remember the CFTC having authority over the ‘derivative market’ of LeBron James rebounds,” Republican Gov. Spencer Cox of Utah wrote in response to a social media post from CFTC chairman Michael Selig in February. Cox vowed to use “every resource” to block the market from his state.

Congress is vowing a crackdown, too.

Members on both sides of the aisle are pushing for more oversight of bets on war, assassinations, terrorist attacks and a person's death. Federal law already gives the CFTC the authority to bar some of these so-called event contracts, but some lawmakers are seeking an outright ban. “There is no justification for gambling on lives,” said Democratic Sen. Adam Schiff last month, noting that bets on war could also tip off U.S. enemies and therefore are national security risks.

What Trump thinks

Trump's family stands to profit if the industry grows, yet another conflict in a presidency rife with them.

His oldest son, Donald Trump Jr., has a stake in Polymarket through a venture capital fund in which he is a partner. He is also an adviser to both Polymarket and Kalshi. And the Trump business that runs the social media platform Truth Social has plans to build its own prediction market, called Truth Predict.

As for the president himself, its not clear if he's going push for more regulation, though he has turned somewhat critical.

“I was never much in favor, and I don’t like it conceptually, but it is what it is," he said Thursday, referring to the online bests. "Now, I think that I’m not happy with any of that stuff.”