Prediction Markets Explode in Popularity—But ’Insider Trading’ Fears Loom. What’s the Next Move?

Prediction markets are having a moment—and regulators are sweating. These platforms, where users bet on everything from election outcomes to product launches, have surged from niche curiosity to mainstream financial tool. The pitch? Harnessing the 'wisdom of the crowd' to forecast real-world events with uncanny accuracy. The problem? That same crowd might include people with a sneak peek at the answers.

The Insider Trading Question That Won't Go Away

Traditional markets have rules, watchdogs, and decades of case law defining what constitutes illegal insider activity. Prediction markets? Not so much. The decentralized, often anonymous nature of many platforms creates a gray area ripe for exploitation. Imagine a pharmaceutical employee betting against their company's drug approval before the public announcement. Or a political staffer cashing in on a policy leak. It's not just theoretical—it's a gaping regulatory blind spot that has traditional finance veterans clutching their pearls (and their compliance manuals).

Can Code Outrun the Regulators?

The industry's response leans heavily on technological fixes: zero-knowledge proofs for anonymous yet verified identities, decentralized oracle networks to prevent data manipulation, and smart contracts designed to be tamper-proof. The ethos is clear: build systems so transparent and robust that cheating becomes impossible, not just illegal. It's a compelling vision—a market governed by math instead of men. But skeptics wonder if it's just a high-tech shell game, moving the opacity from the backroom to the blockchain.

What Comes Next: Adaptation or Crackdown?

The path forward splits in two. One route sees prediction markets integrating deeper into traditional finance, adopting watered-down KYC rules and seeking regulatory blessings. The other doubles down on decentralization, pushing the boundaries of what's possible—and legal—in a headlong rush toward a truly open global forecasting engine. The tension is palpable. Every major political event, corporate earnings surprise, or scientific breakthrough that gets 'predicted' on these platforms adds fuel to the fire. Success attracts both users and scrutiny in equal measure.

One thing's certain: the genie won't go back in the bottle. The demand for these tools is real, driven by a deep-seated human desire to hedge against uncertainty and, let's be honest, to make a speculative buck. The old guard may scoff, calling it gambling dressed in fintech drag—another cynical attempt to repackage a casino as a disruptive innovation. But the data doesn't lie. Prediction markets are here. The only question left is who gets to write the rules.

Key Takeaways

• Event contracts are viewed as information, but also assets, making it all the more difficult to figure out which rules do and don't apply to them.
• Prediction markets are regulated by the Commodity Futures Trading Commission, whose "Eddie Murphy rule" is aimed at preventing misappropriation of confidential information for unfair gain. But a busy run of regulatory debate seems likely.

Someone profited handsomely after winning an unlikely short-term bet on Nicolás Maduro's fate. The win kicked off a round of intense scrutiny of prediction markets.

How, the questions went, could they have known what WOULD happen in Venezuela with such confidence? If they did know, did that amount to market manipulation? And if it did, how many more winners were trading on confidential information for their own gain?

That paranoia—or, more charitably, the curiosity—appears to be percolating. On social media, skeptics routinely peruse wagers and wonder aloud whether they might constitute something like "insider trading," a term generally used for the illegal practice of buying or selling securities using privileged information. Legislators have also expressed interest in learning more.

So is something amiss on prediction markets, one of the fastest-growing segments of trader enthusiasm and activity? If it is, what should be done? The short answer: It's complicated.

WHY THIS MATTERS TO YOU

Prediction markets are becoming more mainstream, with their data starting to show up on major news networks including CNN.

The question of who should regulate prediction markets—and how it would be best done—remains unsettled in the U.S., with lobbying activity and legal battles still picking up. Within the range of opinions is even a theory that insider activity might shore up trust and accuracy, contrasting conventional market wisdom that integrity should be protected. Social media users are far from unanimous, with some calling prediction markets "a cesspool of insider trading" and others saying "Calling insider trading a 'problem' in prediction markets misses the point."

Though the specific Maduro bet mentioned above was placed on Polymarket's offshore venue—and thus perhaps beyond the reach of U.S. regulation—some have openly questioned its legitimacy. A dozen senators earlier this month sent a letter to the Commodity Futures Trading Commission's chair Mike Selig asking about wagers associated with the event as brought to light by The Wall Street Journal and wondering what the agency was doing to make sure prediction markets were following the rules.

CEOs of prediction markets say they're not running amok. Tarek Mansour, co-founder and chief of Kalshi, wrote in a social media post after Maduro's ouster that "Insider trading is banned on Kalshi (and always has been)."

Related Education

The CFTC is the primary regulator of prediction markets, including Kalshi and Polymarket, because event contracts are categorized as financial derivatives. (In the context of traditional "insider trading," the "Eddie Murphy rule" aimed at preventing the misappropriation of confidential information for unfair gain—named for the actor in the movie Trading Places—would apply.)

But policing a new market is hard when existing rules weren't designed with it in mind, and the array of contracts tied to everything from geopolitical events to sports and award ceremonies makes matters even more complex.

The CFTC can shut down contract categories—terrorism, war and gaming—that it deems "contrary to the public interest," according to Andrew Kim, a partner at law firm Goodwin Procter. But there is a debate around what "gaming," in particular, means, Kim told Investopedia.

The CFTC during the Biden administration forced Polymarket offshore in 2022. In 2024 it proposed a rule that aimed to define what "gaming" meant as it pertains to event contracts. That proposal hasn't gone anywhere.

Under the current TRUMP administration, Polymarket has relaunched in the U.S. It, along with other prediction markets, have in the past year or so begun offering sports-related event contracts. That's when state gambling regulators got involved, arguing in courts that contracts tied to sports games are unlicensed wagers and thus that prediction markets should be under their authority.

Prediction markets say their contracts are federally regulated, an issue that the Supreme Court may ultimately settle. Selig, meanwhile, recently launched a committee to "gather expertise and recommendations on innovation in financial markets;" his planned nominations include Polymarket chief Shayne Coplan, Mansour, and leaders of derivatives and crypto exchanges.

Prediction market operators appear to be trying to get ahead of the next round of rulemaking. Crypto.com, Coinbase (COIN), Kalshi and Robinhood (HOOD) last month formed the Coalition for Prediction Markets to establish "guardrails that prevent insider trading and ensure all participants operate on equal footing" and "defend against state-level overreach."

Then there's the debate about whether insider action on prediction markets might be good. If the masses look to prediction markets for information—odds on some contracts are already visible on CNN—insider bets, the argument goes, might bolster their accuracy.

Coinbase Global (COIN) chief Brian Armstrong said last month that deciding whether insider trading should be allowed in prediction markets depends on what use they serve: If prediction markets are meant to be a type of oracle, "you want insider trading" for the "higher quality signal, but if the goal was to "preserve the integrity of those markets," it shouldn't exist. Coinbase last month announced its own predictions market.

"Part of the growing pains of this industry is going to be figuring out issues like 'insider trading"'and striking a balance—providing the signaling function that they were intended to do, while also ensuring that customers are protected from market manipulation and abuse," Kim said.