Kalshi, Polymarket, and the Insider Trading Problem: Why Platform Rules Are Not Enough

On March 23, 2026, two U.S. senators introduced legislation that could fundamentally reshape the prediction market industry. Senator Adam Schiff (D-California) and Senator John Curtis (R-Utah) introduced the "Prediction Markets Are Gambling Act," a bill that would ban prediction market platforms from offering contracts tied to sports events. The same day, the two largest prediction market platforms, Kalshi and Polymarket, announced new internal rules targeting insider trading. The timing was not a coincidence.

This article is part of a continuing series on event contracts and prediction market regulation. Earlier articles in this series covered the Polymarket TRO denial in Michigan, the Ohio Kalshi preliminary injunction denial, the CFTC's amicus brief in North American Derivatives Exchange v. Nevada, and the broader regulatory framework governing these platforms under the CLARITY Act. This article focuses on a new question: when users of prediction markets appear to trade on inside information, is platform self-regulation a legally adequate response, or does the CFTC need to act?

What Is a Prediction Market?

A prediction market, also called an event contract, is a financial instrument that allows participants to take positions on the outcome of future events. These events can range from elections and economic data releases to weather and sporting results. Participants buy or sell contracts, and the price of a contract reflects the market's collective estimate of the probability that the event will occur. If the event happens, the contract pays out. If it does not, the contract expires worthless.

Prediction markets are regulated in the United States as derivatives. The Commodity Futures Trading Commission (CFTC), the federal agency that oversees derivatives markets, has jurisdiction over these instruments. Kalshi operates as a designated contract market (DCM) under CFTC regulation. Polymarket, which is based outside the United States, serves U.S. users through a more complex structure that has drawn ongoing regulatory scrutiny.

The Insider Trading Problem

The precipitating event for this week's developments was serious. Earlier this year, certain Polymarket users placed large bets ahead of U.S. military action in Iran and Venezuela. Those users appeared to profit substantially from knowing in advance that military strikes were coming. The bets were placed before any public announcement. The profits, in at least some cases, were significant.

This is the prediction market version of insider trading.

In the securities markets, insider trading is a well-developed area of law. It is generally illegal for a person who possesses material, nonpublic information to trade securities on the basis of that information, or to tip others who then trade. The SEC has enforcement authority, and the legal framework has been built up over decades through statutes, SEC rules, and court decisions.

No equivalent framework exists for prediction markets.

The CFTC has broad antifraud authority under the Commodity Exchange Act. It can pursue manipulation and fraud in derivatives markets. But there is no specific regulatory rule that defines and prohibits insider trading in event contracts the way SEC Rule 10b-5 addresses it in securities markets. The CFTC has not issued a rulemaking on point.

What the Platforms Did

Faced with a congressional threat and significant reputational damage, Kalshi and Polymarket moved quickly to adopt new internal rules.

Kalshi announced two specific prohibitions. First, political candidates may not trade on contracts related to their own campaigns. Second, individuals employed in or connected to college or professional sports may not trade contracts related to those sports.

Polymarket went further. The company rewrote its rules to bar trading by any user who possesses confidential information relevant to a contract's outcome, or who has the ability to influence that outcome. This formulation is notably broad. It would cover not just athletes and coaches, but government officials, corporate executives, and anyone else with material nonpublic information about an event.

These are meaningful steps. But they raise a fundamental question: are they enough?

The Problem with Self-Regulation

Platform rules are not law. They are contract terms between the platform and its users. A platform can ban a user, freeze an account, or void a trade. What a platform cannot do is compel testimony, issue subpoenas, impose civil penalties, or refer matters for criminal prosecution. Self-regulatory rules are only as strong as the platform's ability and willingness to enforce them, and only as credible as the platform's incentive to do so when enforcement is costly.

The identification problem is equally serious. Polymarket's new rule prohibits trading by anyone who possesses confidential information relevant to a contract's outcome. But prediction market platforms do not know what their users know. There is no equivalent of a financial disclosure form or a pre-clearance requirement. A government official, a military contractor, or a corporate executive who holds inside information and opens an account is under no obligation to announce that fact. Compliance with the rule rests almost entirely on the user's own willingness to self-identify. That is, practically speaking, an honor system.

There is also a structural problem. Platforms benefit financially from trading volume. Aggressive enforcement that identifies and removes high-volume traders cuts into revenue. The incentive to look closely at profitable accounts is weaker than the incentive to leave them alone. This is not a criticism of any specific company. It is a basic observation about how self-regulation works in any profit-driven industry.

And what happens to a user who violates the rule? The platform can ban the account. It can attempt to void or claw back profits, though the legal mechanics of doing so across jurisdictions and anonymous or pseudonymous accounts are not straightforward. Beyond that, the options are limited. There is no prediction market equivalent of an SEC enforcement action, no civil penalty authority, no mechanism for disgorgement of profits by a federal regulator, and no automatic referral pathway to the Department of Justice. A sophisticated bad actor who trades on inside information and keeps winnings in a foreign account faces little practical consequence beyond losing access to one platform. Nothing prevents that person from opening an account elsewhere, including on offshore platforms that fall entirely outside U.S. regulatory reach.

The securities markets addressed this problem through a mandatory regulatory structure. Broker-dealers are required to have written supervisory procedures for detecting and reporting suspicious trading activity. FINRA, a self-regulatory organization with delegated authority from the SEC, conducts surveillance and enforcement. The SEC maintains its own enforcement program. Criminal referrals to the Department of Justice are possible.

None of this infrastructure exists for prediction markets.

The CFTC's Role and the Conflict of Interest Problem

The CFTC has the authority to build this infrastructure. It could issue a rulemaking that defines insider trading in event contracts, establishes surveillance requirements for DCMs like Kalshi, and creates an enforcement framework with real penalties. It has not done so.

What the CFTC has done, under its current chairman Michael Selig, is commit to backing Kalshi in state-level litigation. Several states, including Nevada and Utah, have attempted to restrict or ban prediction market platforms, arguing that they are effectively sports betting operations. Chairman Selig has taken the position that federal law preempts these state efforts.

This regulatory posture, favorable to the industry at the federal level while resisting state oversight, would be unremarkable in isolation. It becomes more complicated given the financial relationships involved. Donald Trump Jr. has invested in Polymarket through his venture capital firm and serves as a strategic adviser to Kalshi. Any favorable regulatory treatment the CFTC extends to these platforms has the potential to benefit the president's family financially. The CFTC chairman serves at the pleasure of the president.

This does not mean the CFTC's current legal positions are wrong. The federal preemption argument is a legitimate one. But it does mean that any regulatory framework for prediction market insider trading needs to be developed through a transparent, notice-and-comment rulemaking process, with a clear record, rather than through ad hoc agency decisions that are difficult to review.

The Legislative Threat

The Schiff-Curtis bill would ban prediction markets from offering sports contracts entirely. If enacted, it would eliminate a large and growing portion of both Kalshi's and Polymarket's business. Both companies have entered into partnerships with sports teams and leagues. Shares of the parent company of FanDuel and DraftKings rose on the day of the bill's introduction, a market signal that traditional sports betting operators see the legislation as removing a competitor.

Schiff and Curtis are not the first legislators to propose restricting prediction markets. But the bipartisan nature of the bill matters. When both parties are skeptical of an industry, the political environment for the industry becomes significantly more difficult. The fact that two senators from different parties are willing to co-sponsor legislation targeting prediction markets suggests that the lobbying advantages these platforms have relied on may be eroding.

Utah's Governor Spencer Cox recently signed legislation expanding the state's definition of gambling to include certain types of contracts that Kalshi and Polymarket offer. Several other states have moved in similar directions. Kalshi has pursued litigation to invalidate state restrictions on preemption grounds, with limited success so far.

What Needs to Happen

The insider trading problem in prediction markets is real and it is not going away. Platform self-regulation is a start, but it is not a substitute for a formal regulatory framework. Three things need to happen.

First, the CFTC should issue a rulemaking that defines insider trading in event contracts and establishes specific prohibitions. The definition should address both direct trading on material nonpublic information and tipping, consistent with how those concepts have developed in securities law, while accounting for the differences between event contracts and equity securities.

Second, CFTC-registered platforms should be required to implement mandatory surveillance programs for detecting suspicious trading patterns, similar to the supervisory requirements that apply to securities broker-dealers. These programs should be subject to CFTC examination.

Third, the CFTC should establish a clear referral pathway for cases involving government officials or others whose trades raise national security concerns. The Iran and Venezuela trading activity, whatever its ultimate explanation, demonstrated that this pathway does not currently exist in any meaningful form.

The prediction market industry has grown rapidly and has attracted serious institutional and political support. That growth will not be sustainable if the markets become associated with repeated episodes of insider trading that go unaddressed. A credible regulatory framework protects market integrity. It also protects the platforms themselves.

De Silva Law Offices, LLC, is a financial regulatory law firm in Chicago. The firm advises clients on CFTC and NFA matters, derivatives regulation, event contracts, and private placements. This article is for informational purposes only and does not constitute legal advice.