By Lisa Iantorno
Prediction markets are exchange platforms that specialize in offering event contracts. An event contract is a financial derivative tied to the outcome of specific real-world events like economic data releases, elections, or corporate earnings. They are normally binary, allowing users to bet “yes” or “no” on the outcome of such events, and are low-cost instruments that settle for either $0 or $1 depending solely on whether the predicted event occurs. They offer limited-risk, short-term speculation, i.e., contract durations can range from minutes to a week, and settlement occurs daily with a payoff structure tied to the occurrence or non-occurrence of a specific event.
Event contracts also function as tools for speculating on or hedging against specific, and sometimes unpredictable, events. Users purchase and sell these event contracts, which continuously establishes prices for them. These prices, in turn, provide informational value on the probability of a certain event occurring.
The term “prediction market” may seem like a sophisticated term for what laypersons recognize as gambling. The “textbook” definition of the term prediction markets implies that they differ from gambling due to the following characteristics: (1) peer-to-peer trading, (2) dynamic pricing based on probability, and (3) the ability to sell positions before an event is realized. With gambling, one bets against the “house” with fixed odds. With prediction markets, participants buy or sell financial instruments (event contracts or swaps).
Accordingly, with prediction markets, prices fluctuate based on supply and demand and provide information on the collective probability of an outcome. Unlike fixed odds betting, prediction markets also offer liquidity because participants can sell their positions to take profits or avoid losses before the event is realized. Prediction markets also make money by charging a transaction fee (spread), while gambling profits arise from the bettor’s losses. Because they involve financial risk and provide a centralized venue for betting on uncertain outcomes, detractors argue that prediction markets are essentially equivalent to gambling because inherent in participation is similar risk of loss. The more important concern, however, for investment advisers and CEA-registered entities considering using event contracts for client accounts or permitting employees to transact in them through personal trading accounts, is the potential for insider trading.
Event contracts are regulated by the CFTC, and recent changes driven by litigation and the CFTC’s current regulatory posture have led to the meteoric proliferation of consumer-facing CFTC-regulated event contracts from markets like economic indicators, weather, politics and sports. This issue has sparked jurisdictional issues (i.e., CFTC vs. state regulation) that are currently being litigated.
At the heart of this litigation is whether such markets are more similar to, and should be regulated as, traditional derivatives markets (specifically swaps) regulated by the CFTC, gambling regulated by state law, or some combination of the two. The popularity, regulation, and range of prediction markets have given rise to important policy considerations, including insider trading.
Context
Prediction markets operate on a quote-based system in which the underlying price for an event contract is determined by the economic principle of supply and demand, with participants’ continuous buying and selling reaching equilibrium. This contrasts with gambling, such as legalized sports gambling, where the gaming company controls gambling odds and where the odds are adjusted by the gambling firm because of underlying bets by users or relevant events.
Kalshi and Polymarket are currently the two major prediction markets; however, firms that operate in this space vary in terms of their specific business models, the way they accept deposits, fee structure, integration with other aspects of their business, and various trading rules. They typically express contracts in percentage terms and operate on a transaction-based fee model. For example, Kalshi runs a CFTC-regulated exchange, while Polymarket’s largest prediction market exchange is domiciled offshore and claims to block U.S. users. Robinhood, DraftKings, and FanDuel also offer event contracts, with each implementing their own different business practices.
Sports make up the most common contract type by volume; however, prediction market exchanges offer a wide array of event contracts. By volume, the largest categories outside of sports include cryptocurrency, culture, and politics, including event contracts on federal legislation and congressional hearings.
The CFTC has recently taken the position that many types of event contracts, including sports event contracts, fall within the Commodities Exchange Act’s (“CEA’s”) definition of a swap. The CFTC contends that it has exclusive authority over derivatives markets, including event contracts on registered designated contract markets, and that, as a result, such sports event contracts are not subject to state or tribal regulation. Several states are currently challenging this position in court, and litigation is pending.
These recent shifts in the regulatory climate, particularly those supporting a more permissive sports event contract landscape, have intensified jurisdictional tensions between federal regulators and state gaming authorities, as reflected by the number of pending lawsuits presenting challenges from state and tribal entities. In February 2026, the CFTC filed an amicus brief challenging Nevada’s attempts to regulate sports event contracts, arguing that this would undermine the CFTC’s exclusive jurisdiction over event contracts traded on derivatives exchanges. Such litigation over jurisdictional issues is ongoing.
Members of Congress have also examined how to regulate event contracts and whether further clarification of the CEA is necessary to reduce regulatory arbitrage or clarify the range of allowed event contracts. Some congresspersons have indicated their support for the CFTC’s position, while others have indicated their opposition. Legislation is currently pending in Congress that would directly prohibit certain types of event contracts, including (1) sports and casino-style games ; (2) contracts related to terrorism, assassination, war, gaming, elections, or government activity; (3) contracts related to activity that is unlawful under any federal or state law; and (4) other activities the CFTC determines to be against the public interest, with a state opt-out for gaming. Another pending bill proposes excluding event contracts from the CEA, delegating regulation to the states, and imposing new standards, e.g., that users must be above the age of 21.
Insider Trading
One major policy challenge related to event contracts involves restrictions on the types of individuals who can trade event contracts, i.e., restricting individuals with nonpublic or confidential information, or individuals directly affiliated with the event. Because certain event contracts (e.g., company earnings or geopolitical actions) may be more likely to have predetermined outcomes, the risk of individuals trading on such material nonpublic information in prediction markets may be heightened. Certain exchanges already have rules addressing aspects of this issue, and existing CFTC regulations may already prohibit limited forms of insider trading involving event contracts for employees of prediction markets who transact using information obtained through their employment at the exchange. The degree to which such provisions may be meaningfully enforced with respect to prediction markets is an open question, but regulatory agencies have recently signaled their inclination to scrutinize and potentially pursue enforcement measures for trading on inside information in prediction markets. For example, in February, the CFTC issued its first formal advisory warning about insider trading risks in prediction markets. The agency cited cases involving a political candidate betting on his own race and a media professional trading on unreleased content.
Further, in March, both Kalshi and Polymarket updated their rules to explicitly prohibit trading based on confidential information, a coordinated move that underscored growing concern. In April, Kalshi also suspended multiple congressional candidates for betting on their own elections, including one who publicly acknowledged doing so to challenge the regulatory framework.
Most significantly to date, the Department of Justice (“DOJ”) announced on April 23 the unsealing of an indictment charging Gannon Ken Van Dyke, a U.S. Army soldier, with unlawful use of confidential government information for personal gain, theft of nonpublic government information, commodities fraud, wire fraud, and making an unlawful monetary transaction. The charges stem from an alleged scheme in which Van Dyke used sensitive classified information to make bets on Polymarket.
As alleged in the indictment, Van Dyke participated in the planning and execution of “Operation Absolute Resolve” to capture former Venezuelan President Nicolás Maduro and used his access to classified information about that operation to place profitable bets on Polymarket. Specifically, the indictment alleges that Van Dyke made more than $400,000 trading on Polymarket based on classified information (a key element of insider trading) regarding the timing of a U.S. military operation to capture Maduro in Venezuela. The case has been assigned to the Southern District of New York (“SDNY”), the venue where most insider trading cases in the United States are prosecuted.
Former SEC Chairman Jay Clayton, who is currently the U.S. Attorney for the SDNY, issued the following statement about the indictment: “Prediction markets are not a haven for using misappropriated confidential or classified information for personal gain. The defendant allegedly violated the trust placed in him by the United States Government by using classified information about a sensitive military operation to place bets on the timing and outcome of that very operation, all to turn a profit. That is clear insider trading and is illegal under federal law.”
Following his successful trading of Maduro- and Venezuela-related contracts, Van Dyke allegedly tried to launder the trail of his proceeds by sending them to a foreign cryptocurrency vault prior to depositing them into a newly created online brokerage account. On the same day of Operation Absolute Resolve, Van Dyke withdrew most of his alleged unlawful proceeds from his Polymarket account. Shortly after the announcement of Operation Absolute Resolve became public, reports of unusual trading in Maduro-related contracts on Polymarket appeared in the press and on social media, after which Van Dyke allegedly then took steps to conceal his identity as the trader in the Maduro- and Venezuela-related markets.
While the SEC and CFTC have not yet undertaken significant enforcement activity or made criminal referrals to the DOJ stemming from examinations of investment advisers and CEA registered entities, it seems inevitable in the current regulatory climate that identifying and prosecuting violations of insider trading regulations and laws may soon become an enforcement priority. While vigorous enforcement may seem to be on the horizon as opposed to an immediate mandate, investment advisers and CEA registered entities should anticipate heightened regulatory scrutiny of participation in prediction markets in their compliance programs.
The simplest solution would be to prohibit all employees from trading in prediction markets; however, such a prophylactic solution may not be feasible in many cases.
Should investment advisers and CEA-registered entities trade in prediction markets for their own portfolios and/or permit employees to trade through personal accounts, firms should implement appropriate controls. These may include updating risk assessment matrices, explicitly addressing prediction markets in insider trading policies and other areas of the compliance program, strengthening MNPI-related language in NDAs and confidentiality agreements, increasing surveillance of high-risk employees, prohibiting transactions involving company-related event contracts and outcomes, and conducting periodic employee training.
Salus is ready to assist current and prospective clients with navigating the compliance risks associated with this dynamic market.