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US Lawmakers and Federal Regulators Clash with States Over Prediction Market Oversight

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The Battle for Prediction Markets: Insider Trading, State vs. Federal Power, and a Booming Industry

The prediction market industry, led by platforms Kalshi and Polymarket, has expanded rapidly, processing billions of dollars in weekly wagers on events ranging from sports and elections to geopolitical conflicts. This growth has triggered a multi-front conflict between the federal government, which claims exclusive regulatory authority, and state regulators, who allege the platforms constitute illegal, unlicensed gambling. Concurrently, lawmakers in Congress have proposed multiple bills to restrict the industry due to concerns over insider trading, market manipulation, and gambling addiction.

Analysis of Well-Timed Trades Raises Insider Trading Concerns

Multiple analyses have identified instances of traders on Polymarket and Kalshi making highly profitable bets shortly before major events became public. These findings have prompted calls for investigations from U.S. lawmakers.

Pardons by President Biden

An analysis by the analytics firm Bubblemaps, shared with NPR, identified a trader on Polymarket who made approximately $316,346 in profit from bets on pardons issued by President Joe Biden at the end of his term. The trader placed bets totaling around $64,000 on pardons for Jim Biden, Liz Cheney, Adam Schiff, and Adam Kinzinger, and a separate earlier bet on a pardon for Hunter Biden. All bets were successful. Bubblemaps used pattern-matching software to identify two accounts with a perfect record on these bets and linked them via a shared deposit wallet on the Kraken exchange.

Joshua Mitts, a Columbia Law School professor who advises the Department of Justice on insider trading cases, stated that the odds of this trading pattern occurring by random chance were "virtually zero." Mitts noted the trader could have been a White House insider or could have possessed the information without being an insider. He published a paper estimating that $143 million in profits on Polymarket may have been earned using insider information.

Geopolitical Events

The Associated Press reported that at least 50 new accounts on Polymarket placed substantial bets on a U.S.-Iran ceasefire hours before President Donald Trump announced it. These were the only bets made by these accounts. Other instances of prescient wagers include:

  • A $400,000 profit on Venezuelan leader Nicolas Maduro's capture hours before it occurred
  • A $550,000 profit related to the start of the Iran war
  • A study of Polymarket activity found over $850,000 in bets by 150 accounts predicting a strike on Iran by a specific date
  • A trader operating under the username "Magamyman" reportedly gained over $553,000 by betting on Iran's Supreme Leader, Ayatollah Ali Khamenei, being out of power just before an Israeli strike killed him

Weather Station Tampering

French authorities investigated possible tampering with a weather monitoring device at Charles de Gaulle Airport after a Polymarket trader profited $21,398 from a bet that Paris would record a temperature exceeding 64°F on April 15, 2025. Météo-France filed a complaint about possible equipment tampering after meteorologists suggested the anomaly was not natural.

Congressional and Legislative Response

Multiple lawmakers have introduced legislation or called for investigations in response to the activity on prediction markets.

Calls for Investigation

  • Rep. Ritchie Torres (D-N.Y.) sent a letter to the Commodity Futures Trading Commission (CFTC) requesting a review and investigation of well-timed trades on Polymarket.
  • Sen. Richard Blumenthal (D-Conn.) sent a letter to Polymarket seeking explanations for allowing trades on war and violence and inquiring about efforts to prevent insider trading.

Proposed Legislation

Senators Jeff Merkley (D-OR) and Elizabeth Warren (D-MA), along with Representative Jamie Raskin (D-MD), introduced the STOP Corrupt Bets Act, which seeks to ban bets on elections, government actions, war, and sports. The bill would mandate a Government Accountability Office (GAO) study on prediction markets and potential insider trading.

Senators Todd Young (R-Ind.) and Elissa Slotkin (D-Mich.) introduced a bill to prohibit federal employees from using nonpublic information to bet on prediction markets.

Senators Adam Schiff (D-Cal.) and John Curtis (R-Utah) introduced bipartisan legislation to prohibit CFTC-regulated entities from offering contracts related to sporting events and "casino-style games."

Sen. Chris Murphy (D-Conn.) announced an intention to introduce legislation targeting the profiting from war by individuals associated with former President Trump.

Industry Self-Regulation

Kalshi reported conducting over 200 insider trading investigations in the past year, with 12 currently active. The company publicly disclosed an investigation into Artem Kaptur, an editor for YouTuber MrBeast, for alleged insider trading on markets related to MrBeast videos. Kalshi froze his account, issued a $20,000 fine, and reported the case to the CFTC. Kalshi also banned former political candidate Kyle Langford for encouraging others to bet on himself in an election.

Regulatory Authority and Legal Battles

The legal status of prediction markets is being contested across multiple jurisdictions.

Federal Position

The Commodity Futures Trading Commission (CFTC), led by Chairman Michael Selig, asserts exclusive federal jurisdiction over prediction markets, classifying them as "swaps" or "futures contracts" under the Commodity Exchange Act. The CFTC filed lawsuits against Illinois, Connecticut, and Arizona to prevent what it described as unlawful state-level regulation. The CFTC also filed an amicus brief in the Ninth Circuit Court of Appeals to defend its jurisdiction, supporting Kalshi against challenges from Nevada.

A federal appeals court (3rd U.S. Circuit Court of Appeals) ruled 2-1 that the CFTC holds exclusive jurisdiction over Kalshi's sports-related event contracts, preempting New Jersey gaming regulators from prohibiting the platform's operations in the state.

State Opposition

Multiple states have initiated legal actions against prediction market operators:

  • Arizona: Attorney General Kris Mayes filed 20 criminal misdemeanor charges against Kalshi for allegedly operating an illegal gambling business and taking bets on state elections.
  • Nevada: The Nevada Gaming Control Board obtained a temporary restraining order against Kalshi, preventing it from offering event contracts to state residents without a license.
  • Massachusetts: The attorney general obtained a preliminary injunction temporarily barring Kalshi from offering sports contracts without a state license. Polymarket subsequently sued the state.
  • Connecticut, Illinois, Arizona: All three states issued cease and desist orders to prediction market companies. The CFTC subsequently sued these states to assert federal jurisdiction.
  • New Hampshire: State Senator Tim Lang announced plans to introduce legislation to allow the state to sue prediction market companies.

State officials argue that prediction markets offer unlicensed sports gambling, bypassing state taxes and consumer protections such as age limits and responsible gaming mandates. Connecticut Attorney General William Tong stated the federal government was "recycling industry arguments" that had been rejected in district courts.

Responses from Sports Leagues

  • The NFL sent letters to Kalshi and Polymarket requesting they stop trades on specific events, including announcer comments, draft picks, and injuries, citing susceptibility to manipulation.
  • The MLB announced a deal with Polymarket.
  • The NHL, UFC, and MLS have established partnerships with prediction market operators.

Profile of Major Platforms and Market Growth

  • Kalshi: Co-founded by Tarek Mansour and Luana Lopes Lour. Kalshi is regulated by the CFTC as a designated contract market. The company reported a 1,000% increase in trading volume to over $2 billion traded weekly. In December 2025, the company raised $1 billion, achieving an $11 billion valuation. Donald Trump Jr. serves as a strategic adviser.
  • Polymarket: Founded by Shayne Coplan. Polymarket operates mostly as an overseas exchange, accessible in the U.S. via VPN. The platform uses cryptocurrency, which can facilitate trader anonymity. The platform was banned in the U.S. in 2022 but is seeking to re-enter the country by acquiring a CFTC-licensed exchange. Donald Trump Jr. is an investor and adviser.
  • Truth Social: Announced plans to offer prediction markets via Crypto.com.
  • Market Size: The investment firm Bernstein projects prediction markets could become a $1 trillion industry in the next four years.

International Incidents

Israeli authorities arrested several people and indicted two on charges of using classified military information to place bets on Polymarket. The cases involved military reservists trading on Polymarket using classified intelligence regarding attacks on Iran.