Legal Pressure Mounts on Prediction Markets as Courts, States Clash

Prediction market platforms such as Kalshi and Polymarket have come to face greater legal threats in the US due to an increase in trade activity. The biggest complaint is the presence of sports markets and presently, over 85% of Kalshi's trading activity involves sports contracts.

Kalshi generated $25 million in fees tied to March Madness alone. Across the sector, weekly trading volumes have climbed past $1 billion, shifting the debate from niche finance to a national regulatory issue.

States have begun to act. Ohio imposed a $5 million penalty on Kalshi, while Arizona, Connecticut, and Illinois issued their respective cease-and-desist orders. Tribal gambling organizations have also been supportive. They have joined sports betting operators' concerns regarding unfair competition to those operations.

The dispute centers on classification for prediction market apps. Kalshi argues its contracts are federally regulated event contracts under the Dodd-Frank Act, placing oversight with the Commodity Futures Trading Commission. State regulators argue that contracts tied to sports outcomes function as wagers and fall under gambling laws.

Courts are now split. A federal appeals court ruled in Kalshi's favor in a New Jersey case, holding that federal law preempts state restrictions. Judges in the Ninth Circuit have indicated they may support Nevada regulators.

That divergence increases the likelihood of review by the Supreme Court. A ruling there could determine whether prediction markets remain classified as financial exchanges or are treated as gambling platforms under state control.

Kalshi supports DOJ to investigate insider trading

That legal fight is now intersecting with concerns about insider trading on prediction platforms. Kalshi Co-founder and CEO Tarek Mansour said activity based on non-public information would be treated as a federal crime and could lead to prosecution by the Department of Justice.

"If you commit insider trading on Kalshi, that can and will at some point be a federal crime. It is a federal crime. I actually do expect the DOJ to prosecute some of these cases," he asserted.

Reports have highlighted suspiciously timed trades tied to public events, including political schedules and potential corporate announcements. The concern is that individuals with advanced knowledge could exploit markets designed to reflect public information. That dynamic challenges the core premise that prediction markets operate as neutral forecasting tools.

Mansour said Kalshi believes insider trading should be banned and subject to enforcement measures, including fines and possible criminal action.

"We can impose fines all the way to criminal prosecution. We've released some cases. There's more coming. But over time, it's going to be a bit of a chicken and the egg. There's always going to be bad actors. The goal is to just squash them, like find them and deter them," Mansour added.

Earlier this year, Mansour and Kalshi backed proposed legislation in New York to ban insider trading by government officials.