Cries of insider trading are forcing change

When Kalshi was able to get authorized as a designated contract market and regulated by the Commodity Futures Trading Commission (CFTC) in 2020 they likely thought that put them above all scrutiny, allowing them to offer markets on whatever they like. Unlike Polymarket, which did not seek the same authorization and hence was sued by the CFTC and forced to leave the U.S. for three years, Kalshi was able to offer markets related to elections, entertainment awards, economic events such as intensity of hurricanes, political events and a few sporting futures. But Kalshi and Polymarket really came to the fore around the time of the 2024 elections when media consistently highlighted the percentages on both sites, showing that unlike the polls, both Kalshi and Polymarket had Donald Trump set to win both the election and the popular vote. Kalshi and Polymarket insisted their prediction markets were more accurate than polls because there was real money on the line with them and a vested interest always leads to more accurate results.

As it turned out, Trump did win easily, including all the swing states and the popular vote. And this allowed Kalshi say that it was proof their products were in the best interests of the country because it gave an indication of the true situation and hence they should be allowed to operate. The courts agreed with Kalshi and the CFTC dropped its complaint against them, thereby effectively making their product legal. With this victory in hand, Kalshi decided to expand beyond its offerings to date and include both sports betting as well as current events.

Large bets on Iran, Venezuela raise eyebrows

Polymarket, which was not operating in the U.S., first had a current event market on Israel invading Lebanon in September, 2024, and both Kalshi and Polymarket listed odds on the United States removing Nicolas Maduro from office in Venezuela before the end of January 2026, as well as various offers related to the Iran conflict, which is still ongoing. Among the bets offered were when Iran would have bombs dropped on them and bets on a new Supreme leader in Iran. There are bets currently on when an official ceasefire will take place.

In every one of those instances there were large bets made on the outcome just before the event happened leading to accusations of insider trading. And from an investing standpoint there is nothing that regulators will put up with less than people who make money from knowing ahead of time what will happen. It’s what had Martha Stewart, Ivan Boesky, Jeffrey Skilling, Rajat Gupta and numerous others jailed. And what makes the accusations towards Kalshi and Polymarket the most concerning is that there are unsubstantiated rumors that the majority of 'traders' placing bets on Maduro and Iran were politicians who may have directly been involved in those attacks.

And in the case of sports, there are also accusations of athletes or people close to them who made money on sports props, knowing that those players were going to pull themselves from games or purposely miss pitches or baskets to ensure their props go under the total. These bets occurred both at regulated sportsbooks and prediction markets.

New Insider Trading Rules

Consequently, Kalshi and Polymarket have announced that they are going to put in new rules to curb insider trading. Kalshi issued a press release stating that they were going to use “new screening tools, whistleblower features, and league cooperation to strengthen market integrity.”  In the press release, Kalshi deflected blame from themselves saying that all markets have bad actors and as such are taking measures to pre-emptively screen and block political candidates from betting on their own campaigns, and would block athletes and referees from trading in markets on sports they are involved in.

Many analysts, including those involved in market trading and sports betting, say that isn’t enough because usually it is not the person in the know that places the bets but rather a third party that is trying to hide the identity of the bettor. In sports betting these people are known as beards. And if Joe Blow places a wager at Kalshi on the date the Strait of Hormuz will open, there’s really no way to tie Joe Blow back to an insider who is actually placing the bet. Similarly with sports bets, very often the athlete will tell a friend to place a bet for them and unless the athlete and friend can be proven to be in cahoots, it’s impossible to charge the friend with an offense.

Legislation Efforts

As a result, Senators Adam Schiff from California and John Curtis from Utah have drafted a bipartisan bill called "Prediction Markets are Gambling Act." The legislation would give states, rather than the feds, control over all gambling and would classify the majority of what these sites offer as a form of gambling. That would include sports bets, current events bets, political bets, awards bets and any other type of bet that involves predictions. And of course, casino gambling is already at the discretion of the states. Consequently if the bill goes through, state gambling commissions, rather than the CFTC, would be the regulator. Thus, a state like Utah could ban all prediction sites since they would be deemed a form of gambling, which is against Utah’s constitution. Similarly California gives exclusive rights for casino and sports betting to the Tribes, so prediction market sites would not be allowed in that state either, unless all the Tribes agree, which is very unlikely.

Kalshi has said that banning these bets would move betting offshore, but other than political bets and awards bets there is really no betting offshore on other current events. Most sportsbooks, including those offshore, have a rule that they will not offer bets in bad taste, which would exclude wagering on things like war, hurricanes, or assassinations, which are popular bets at Kalshi and Polymarket. As for election betting, no gambling commissions currently allow wagering on election results, but if this bill goes through then the states will have the right to decide if they want sportsbooks in their states to offer odds on elections and most states would agree that is what the 14th amendment mandates. So those who want to offer bets on elections and/or non-sports can do so, while those that are uncomfortable with that type of betting can ban it. Right now 39 states plus D.C. offer sports betting, so there is a good chance that the majority of states will allow betting of some form on these offerings. That is exactly what Schiff and Curtis want – give the option to the states and don’t force it down the throat of states that want it banned, like is happening now with Kalshi and some other prediction markets.

In its press release Kalshi seemed to insinuate that this new Act is being pushed for by the casino companies and they may be somewhat right. While DraftKings, FanDuel, and BetFanatics offer prediction markets, they are only doing so to compete with Kalshi and Polymarket. But each of those sportsbooks would be only too happy to dump their prediction market sites if they could offer the same bets under the sports betting umbrella and not have to compete with prediction markets.

One wrinkle that could affect the bill is TruthPredicts. The yet-to-be-launched prediction site owned and operated by Trump Media & Technology Group is set to make a lot of money offering bets on elections and various other events. So even if the bill passes in the Senate and/or Congress, there is a good chance Donald Trump will veto it if it reaches his desk so that TruthPredicts can move ahead.

Along with concerns of insider trading, Kalshi is receiving a lot of pushback for voiding bets on the death of Ali Khameini in Iran. Kalshi’s stated reason for voiding the bets had nothing to do with insider trading (although some very large wagers were made on his death before the bombing of Iran by the U.S. and Israel), but rather that they claim to have a rule that disallows people to profit from death. Consequently, Kalshi settled the market at the final trading price prior to Khameini’s death. Similarly, Kalshi and Polymarket have received a great deal of dissent for how they resolved the Israel attack on Lebanon and the capture of Maduro in Venezuela. As mentioned in an earlier article, "Grading of Venezuela invasion contracts illustrates the biggest problem with certain prediction markets," Kalshi graded the invasion of Venezuela as “no” to being an actual invasion, using the government’s argument that it was not a real invasion but rather an arrest warrant being executed, and in the case of Israel and Lebanon, Polymarket used their confusing and very biased UMA to settle the market, which almost all people who bet on the market claimed was not resolved properly. And as anybody who has ever played at a sportsbook whether regulated or not will tell you, the quickest way to kill the book’s reputations and begin its demise is to be seen as a company that does not pay winning bets or tries to settle bets on rules that seem to contradict the real intent of the bet offer.

Future of Predictions Markets in the U.S.

If the bill is successfully implemented, what does that mean for prediction sites in the United States?

If all of these markets are seen as a form of gambling and require sites like Kalshi or Polymarket to get a betting license then they really have nothing unique to offer. And if they decide to remain regulated by the CFTC for bets that are not included under the Act, then they will be able to offer markets on things like the closing price of the Dow Jones, or the future price of gold, silver, or soybeans and I doubt there would be enough interest in that to make either company a going concern. And the election bets, which Kalshi and Polymarket insist are in the public interest since they are more accurate than polls, will instead fall to the sportsbooks in states that allow it, and those sportsbooks can publish the percentage of bets they are getting on candidates and compare it to polls to establish which is more accurate.

So, have the prediction sites bitten off more than they could chew? Had Kalshi and Polymarket stuck with election bets, awards shows and similar they likely would have flown under the radar and not been challenged once the courts ruled that what they were offering was legal. But delving into bets involving wars, kidnappings and similar has opened the door to unfettered insider trading and, as mentioned earlier, that is one thing market regulators will not tolerate. And choosing to offer sports bets puts them in direct competition with sports betting sites. And, no state is willing to accept that it’s not a problem to expect a company like FanDuel to pay taxes and a licensing fee to operate, while at the same time allowing Kalshi to get away with paying nothing for the same offerings.  39 states currently have legal sports betting and will do everything in their power to ensure that the playing field is the same for every company offering sports betting. And for the other 11 that haven’t legalized sports betting, they likely have a reason for that decision. Utah doesn’t even have a lottery or bingo so Kalshi surely must have known that forcing sports betting down the state’s throat would result in pushback.

It’s uncertain whether the “Prediction Markets are Gambling Act” will pass or not, but there are a lot of states and politicians that are willing to go all out to ensure a bill does pass at some point to level the playing field for any company that chooses to offer gambling, whether they call it sports betting or prediction markets. Consequently, the anti-insider trading rules by Kalshi and Polymarket are a good start, but it’s very doubtful that will be enough to stop the calls for those sites to be reigned in.

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