Prediction markets, filled with 24/7 bets, are regulated differently than traditional gambling

Wyatte Grantham-philips, The Associated PRess

Prediction markets let people wager on just about anything — from basketball games to elections. And among the more jarring bets recently, the U.S. military capture of former Venezuelan President Nicolás Maduro.

The raid has evolved into an insider trading scandal. This week, the federal government charged a U.S. special forces soldier who was part of January’s capture with using classified information about the mission to bet on Maduro’s downfall, and pocket more than $400,000 on Polymarket soon after.

Polymarket, one of the world’s largest prediction markets, said it alerted the Justice Department after determining that someone had traded on classified government information and cooperated with the investigation. In a statement, the company maintained that insider trading “has no place” on its platform.

Still, the case is once again putting the spotlight on a murky (and growing) world of speculative, 24/7 transactions now filling the internet. The timing and subjects of particular trades — particularly related to geopolitical conflicts — have fueled scrutiny recently. Earlier this month, The Associated Press reported that a group of new accounts on Polymarket also made highly specific, well-timed bets on the fate of the U.S. and Israel’s war against Iran.

Because prediction market wagers are categorized differently than traditional forms of gambling, tensions about government oversight are rising. President Donald Trump’s administration has already thrown its support behind company operators — and sued three states over their efforts to regulate them further. Meanwhile, other lawmakers in Washington are calling for further investigations and new guardrails.

Here’s what we know:

How prediction markets work

The scope of topics involved in prediction markets can range immensely. Beyond geopolitical conflicts, there’s been a surge of wages on elections and sports games recently. But users also bet on anything from weather forecasts, the likelihood of the U.S. government confirming the existence of extraterrestrial life and how much billionaire Elon Musk might post on social media this month.

In industry-speak, what someone buys or sells in a prediction market is called an “event contract.” They’re typically advertised as “yes” or “no” wagers. And the price of one fluctuates between $0 and $1, reflecting what traders are collectively willing to pay based on a 0% to 100% chance of whether they think an event will occur.

The more likely traders think an event will occur, the more expensive that contract will become. And as those odds change over time, users can cash out early to make incremental profits, or try to avoid higher losses on what they’ve already invested.

Proponents of prediction markets argue putting money on the line leads to better forecasts. And some think there’s value in monitoring prediction markets for potential news, particularly elections.

Still, prediction markets can also be wrong. Traders may be closely following certain events, but others could just be randomly guessing.

Who is behind all of the trading is also pretty unclear, at least to the public. The companies running today’s biggest platforms know who their customers are — as they collect personal information to verify identities and payments. But most users can trade under anonymous pseudonyms on the websites the world can see.

Critics also stress that the ease and speed of joining these 24/7 wagers leads to financial losses everyday, particularly harming users who may already struggle with gambling. The platforms themselves typically make money by taking a small cut of at least some trades, usually in the form of fees.

The major players

Polymarket is one of the largest prediction markets in the world. Users can fund event contracts through cryptocurrency, debit or credit cards and bank transfers.

Restrictions vary by country, although experts note that users might still find ways to buy certain contracts while traveling abroad or through connecting to different VPNs. But for U.S.-based trades, the reach of these markets has expanded rapidly over recent years, coinciding with shifting policies out of Washington.

While prediction markets have found backing from the Trump-controlled Commodity Futures Trading Commission, former President Joe Biden was more aggressive in cracking down. Following a 2022 settlement with the CFTC, Polymarket was barred from operating in the country. That changed under Trump late last year, when Polymarket announced it would be returning to the U.S. after receiving clearance from the commission. American-based users can now join a “waitlist” to access the platform.

Meanwhile, Polymarket’s top competitor, Kalshi, has been a federally-regulated exchange since 2020. The platform offers similar ways to buy and sell event contracts as Polymarket — and it currently allows event contracts on elections and sports nationwide. Kalshi won court approval just weeks before the 2024 election to let Americans put money on upcoming political races and began to host sports trading last year.

The space is now crowded with other big names. Major League Baseball inked a deal with Polymarket last month, following other partnerships in professional hockey and soccer. Meanwhile, sports betting giants DraftKings and FanDuel have launched their own prediction platforms. Trump’s social media site Truth Social has also promised to offer an in-platform prediction market through a partnership with Crypto.com — and one of the president’s sons, Donald Trump Jr., holds advisory roles at both Polymarket and Kalshi.

Last month, The Associated Press agreed to sell its U.S. elections data to Kalshi.

Loose regulation and calls for reform

Because they’re positioned as selling event contracts, prediction markets are regulated by the CFTC. That means they can avoid state-level restrictions or bans in place for traditional gambling and sports betting today.

“It’s a huge loophole,” Karl Lockhart, an assistant professor of law at DePaul University who has studied this space, previously told the AP. “You just have to comply with one set of regulations, rather than (rules from) each state around the country.”

Sports betting is taking center stage. There are a handful of big states — like California and Texas, for example — where sports betting is still illegal, but people can now wager on games, athlete trades and more through event contracts.

A growing number of states and tribes are trying to stop this. But the Trump administration has already pushed back, maintaining that the CFTC has the sole authority to regulate prediction markets. Many lawyers expect litigation to eventually reach the U.S. Supreme Court.

Despite overseeing trillions of dollars for the overall U.S. derivatives market, the CFTC is much smaller than the Securities and Exchange Commission, which regulates the securities industry. And at the same time event contracts are growing rapidly on prediction market platforms, there have been sizeable workforce cuts and leadership departures. CFTC chairman Michael Selig is the sole member filling just one of five commissioner slots.

Meanwhile, Congress members from both sides of the aisle have introduced broad legislation for more guardrails in recent months — including a ban on prediction market bets related to war, assassinations or terrorist attacks. Federal law already gives the CFTC the authority to bar these kinds of event contracts, but some lawmakers are seeking an outright ban.

Calls for change also arrive as insider trading allegations pile up. Beyond the charges spanning from the Maduro-related bets on Polymarket, Kalshi just earlier this week fined and suspended three congressional candidates who it said wagered on the outcome of their own elections.

Both Kalshi and Polymarket have rolled out added guardrails in efforts to combat insider trading recently, notably soon after Congressional pushes for increased oversight.

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