Prediction markets in the United States are facing renewed regulatory scrutiny as trading tied to geopolitical events — including military conflicts and leadership outcomes — raises questions about whether these platforms are operating within existing financial rules.
Industry data indicates that prediction market platforms have facilitated more than $44 billion in event-contract trades over the past year, reflecting rapid growth in a sector that blends elements of financial derivatives and wagering. The expansion has prompted policymakers, regulators, and advocacy groups to examine whether current oversight frameworks adequately address the risks associated with these markets.
At the center of the debate are platforms such as Kalshi and Polymarket, which allow users to buy and sell contracts linked to the probability of real-world events ranging from economic policy decisions to election outcomes.
The recent emergence of contracts tied to military developments and foreign leadership outcomes has intensified pressure for regulatory clarity.
Regulatory scrutiny focuses on geopolitical event contracts
Prediction markets function differently from traditional sportsbooks. Rather than setting odds directly, platforms operate similarly to exchanges, allowing participants to trade “event contracts” that pay out depending on whether a specific outcome occurs.
This model places oversight largely under the jurisdiction of the Commodity Futures Trading Commission (CFTC), which regulates derivatives markets in the United States.
However, U.S. financial regulations prohibit trading contracts tied directly to certain outcomes, including war, terrorism, assassination, or other unlawful activities. Critics argue that some markets related to geopolitical tensions have approached — or crossed — those boundaries.
Advocacy group Public Citizen recently filed a complaint urging regulators to examine contracts tied to military developments in regions such as Iran and Venezuela.
Craig Holman, a government affairs lobbyist at the group, warned that such markets risk normalizing speculation on violent events and could create incentives for market manipulation.
Rapid growth intensifies regulatory debate
Prediction markets expanded significantly during the 2024 U.S. election cycle, after legal developments allowed certain platforms to host contracts linked to electoral outcomes. The activity attracted broader public attention as traders attempted to forecast the result of the presidential race.
The surge in participation has transformed the sector into a rapidly growing financial niche, though questions remain about whether the platforms resemble regulated derivatives exchanges or online gambling operators.
Critics contend that the companies may be positioning themselves as financial exchanges to avoid the state-level regulation and taxation typically applied to sports betting and gaming companies.
Several U.S. states have launched legal challenges asserting that prediction market platforms should fall under local gambling regulations rather than federal derivatives oversight. These disputes have created a complex regulatory landscape involving both federal and state authorities.
Insider trading concerns add pressure
Concerns about potential insider trading have also fueled calls for stronger oversight.
Lawmakers in Washington recently proposed legislation that would restrict federal officials from participating in event-contract trading. The proposal followed reports that certain trades tied to political or military developments appeared to occur shortly before those events became public.
Advocacy organizations have warned that prediction markets could present opportunities for individuals with privileged information to profit from sensitive developments.
Platforms say they are strengthening compliance measures. Kalshi recently disclosed that it has opened roughly 200 investigations into suspicious trading activity over the past year and has issued penalties in several insider-trading cases.
Meanwhile, Polymarket has said it is implementing additional monitoring systems designed to identify unusual trading patterns.
Policy outlook remains uncertain
The regulatory outlook for prediction markets remains fluid.
Earlier regulatory initiatives sought to restrict contracts tied to sports outcomes or political events. However, those efforts stalled following court challenges and a shift in regulatory priorities after the 2024 U.S. election.
In February, the Commodity Futures Trading Commission withdrew a proposed rule that would have broadly prohibited sports- and election-related event contracts.
Officials within the agency have argued that event-contract markets can serve legitimate economic purposes by allowing businesses to hedge risks associated with uncertain events. At the same time, regulators have emphasized that exchanges must still comply with existing rules governing derivatives trading.
As trading volumes grow and new types of event contracts emerge, policymakers face increasing pressure to define where financial prediction markets end and gambling begins — a distinction that will determine how the sector is regulated in the years ahead.
