By intervening in individual bets, companies like Kalshi and Polymarket are not acting as neutral market makers, as they have claimed in litigation.
An employee for content creator MrBeast has been suspended from the prediction market Kalshi for insider trading, which may make it more difficult for the company to prevail in court cases that accuse it of running an unlicensed sports gambling site. Though the two seem unrelated, interventions by prediction markets into the trades they facilitate could undercut their legal arguments and increase their liability, according to former policymakers and experts.
While prediction markets like Polymarket or Kalshi (both of which are advised by Donald Trump Jr.) allow users to gamble on virtually anything, including the content of MrBeast videos, about 90 percent of the volume involves sports betting. Kalshi alone took $1 billion in action during the Super Bowl.
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Several states have argued in court that these companies are violating state gambling laws like age limits, consumer protection statutes, licensing requirements, internal control standards, and audits. There are at least 20 lawsuits happening in seven states, and in Massachusetts, a judge actually shut down Kalshi’s sports betting operation, though an appeals court lifted that preliminary injunction until the case is heard.
Prediction markets have said that they are not gambling platforms, but mere market makers that match up participants on both sides of a “futures contract” while taking a small transaction fee, rather than sportsbooks that set odds and direct betting markets themselves. This, the companies say, makes them financial exchanges subject to federal derivatives market regulation, not casinos subject to state laws. It feels like a clear case of regulatory arbitrage, enabling mass sports betting without following strict rules on sports betting. The fact that betting platforms like FanDuel and DraftKings are busily introducing their own prediction markets to get in on the game affirms that.
The Commodity Futures Trading Commission has filed an amicus brief in several of these lawsuits, taking the prediction markets’ side and saying that they are the industry’s exclusive regulator. (The CFTC, incidentally, has an “Innovation Advisory Committee” that assists the agency in decision-making and … includes the CEOs of Polymarket and Kalshi.) But Kalshi and Polymarket’s success in evading litigation really depends on whether courts buy their arguments that they are just market makers, as they and the CFTC say they are.
If Kalshi or Polymarket polices the trades on its platform, or chooses who ultimately gets to win, that goes beyond just setting up a market, experts contend. It makes them more like the casino.
There are several examples of this. In January, Polymarket determined that the capture of Nicolás Maduro in Venezuela did not amount to an invasion, and therefore millions of dollars in bets on the United States invading the country would not pay off. Polymarket made this unilateral decision based on “a consensus of credible sources.”
This reflected a policy change inside Polymarket, which had been using a strange dispute resolution process (it involved more betting, and the blockchain was enormously complicated). In December, Polymarket announced that they would start resolving disputes on their own as a kind of Supreme Court for controversial bets, explained Corey Frayer, a former congressional banking staffer now at the Consumer Federation of America. “They are now finally saying publicly that they’re running this thing,” Frayer said. “[They] have actively created betting markets and are facilitating the betting markets.”
A second example concerned whether musician Cardi B “performed” at the Super Bowl halftime show. She was in the background of one of Bad Bunny’s set pieces, and can be seen on camera dancing. But did that count as a performance? Polymarket said yes and resolved the contract thusly, while Kalshi ultimately decided that she did not perform. It was the same question, with different betting winners depending on the prediction market being used.
This kind of unilateral decision-making could lead courts to say that prediction markets go beyond mere market-making, in Frayer’s view. The situation isn’t entirely applicable to sports betting, where there is less wiggle room within the outcome: Either a team won or they didn’t, either a player made a three-pointer or scored a touchdown or they didn’t.
But this week’s ejection of an insider trader from Kalshi adds another wrinkle.
In that case, an editor for MrBeast named Artem Kaptur was making a small number of bets (around $4,000) in thinly traded markets about the YouTuber’s future videos that would always turn out to be correct. This, Kalshi said, violated its internal rules on insider trading. The company froze Kaptur’s account, barred him from their platform, and referred the case to the CFTC. (In a smaller case, a California gubernatorial candidate who announced as part of his campaign that he bet on himself on Kalshi to encourage others to do the same was suspended from the app and fined.)
This is the first time Polymarket has publicly documented the results of a market manipulation investigation. That’s despite numerous examples, both substantiated and rumored, about such activity. Famously, a whale bet on Maduro’s capture in Venezuela paid off by hundreds of thousands of dollars. People have been arrested for insider trading on prediction markets in other countries. There are insider trackers for bettors who subsequently make copycat trades on the particular markets where they see this activity. Simply making a big bet can create a jump in odds that can be lucrative, akin to a pump-and-dump scheme. Even the aforementioned Super Bowl halftime show led to rumors of insider betting.
Meanwhile, the standing belief of many commentators, economists, and crypto moguls is that insider trading is good in these markets, because it makes the predictions sharper and more correct. So why did Polymarket enforce this specific case?
There’s a case to be made that this arbitrariness establishes prediction markets as platforms with an interest in the outcome of particular bets. “It’s a long way from a neutral, decentralized platform that’s just software facilitating a market,” said Frayer.
Twelve Senate Democrats have asked the CFTC for information about policing fraud and manipulation on prediction markets. That would be the proper role of the regulator. That the companies themselves are engaged in it makes them look like a casino that establishes house rules — precisely the thing they are arguing against in court.
The Senate Democrats also reminded the CFTC that prediction market gaming contracts would be illegal gambling under the current rules. But the prediction markets may just disqualify themselves.
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