Prediction markets backlash builds possible stormcloud for 2027

CEO Tarek Mansours Kalshi is the target of many state lawsuits combating its right to conduct sports contracts outside of state gambling regulations. (Jesse Hamilton/CoinDesk)

“Every day brings a new lawsuit,” said Liz Davis, a former chief trial attorney in the Commodity Futures Trading Commissions enforcement division who is now a partner at Davis Wright Tremaine. She and other lawyers are assuming the ultimate test of jurisdiction will likely land with the Supreme Court.

“It may take two years, but it almost certainly seems to be going down that path and will go to the Supreme Court,” said Jake Preiserowicz, a former CFTC special counsel now at McDermott, Will & Schulte. Until then, its a “minefield.”

In Nevada, a court has halted Kalshi‘s operations over that argument. Other states are pursuing similar complaints, such as Washington state on Friday. And Arizona’s attorney general elevated the fight by charging Kalshi with 20 criminal counts for running what her accusations labeled an unlicensed gambling business that offered illegal election wagering.

The former White House chief of staff in Trump‘s first administration, Mick Mulvaney, has taken the states’ side of that argument, establishing the new Gambling Is Not Investing Coalition to counter the prediction markets sectors insistence that their businesses deserve to be regulated under federal derivatives rules.

“If it looks like gambling and functions like gambling, it should follow gambling rules,” its website states, arguing that the states and tribal governments should be the proper watchdogs.

After Washington state‘s accusations emerged, Kalshi’s head of communication, Elisabeth Diana, told CoinDesk that her company “is a regulated, nationwide exchange for real-world events, and it is subject to exclusive federal jurisdiction.”

“Its very different from what state-regulated sportsbooks and casinos offer their customers,” she said. “We are confident in our legal arguments.”

Friend at the CFTC

Current Commodity Futures Trading Commission Chairman Mike Selig, whose agency regulates the derivatives space, has pursued a very public campaign to agree with Kalshi that the CFTC has the authority and not the states. Regulating the prediction markets has been among his top policy priorities, and he filed a court brief in one case to stake his claim that the states are improperly infringing on the CFTCs reach into event contracts.

“This power grab ignores the law and decades of precedent,” he said. His agency has been working on new regulations for prediction markets, and it secured an unprecedented memorandum of understanding with Major League Baseball for information sharing.

Selig, whose agency oversees Kalshi and Polymarket as registered designated contract markets, also noted some recent internal enforcement actions executed at Kalshi, suggesting that the firm is fulfilling its duties to police fraud and manipulation.

Kalshi went after two high-profile instances of potential cheating on its platform, suspending and fining a producer who works with the popular Mr. Beast show for betting on the outcome of the show‘s events and a politician for betting on his own candidacy for California’s governorship.

And last week, Polymarket refreshed its market-integrity rules to clarify that it doesnt allow trading on tips or stolen information from people who have a legal duty to keep it secret or trading by people who can influence the outcome of the bet.

However, federal prosecutors have also reportedly spoken to the prediction market firms about whether certain instances could trigger insider-trading cases.

Inside trades？

A TRM analysis suggested insiders may have made bets on the recent U.S. attack on Iran. At Polymarket, the market for “Will the US strike Iran by Feb 28, 2026？” became its largest over, with $73 million in interest, and that date marked the beginning of the war. TRM said it identified four wallets that predicted the strike with about $40,000 in bets that eventually won $872,000.

“These four wallets had largely never traded before and then came in at similar times to place a bet when the U.S. would strike Iran,” TRM said in a report last week. Though it doesnt definitively prove insider trading, all four wallets were funded the same way in a narrow period, and all of them went dark after collecting these winnings.

If Trump administration officials are uncovered for wagering on military actions, that could lend energy to the bills meant to restrict the prediction platforms.

Neither of the leading prediction market companies responded to requests for comment on the onslaught of bills in Congress.

“It seems some of them have little chance of moving forward,” Preiserowicz said. “Other ones, maybe a bit more so, but I think its up in the air right now.”

While Congress weighs action (or inaction), the CFTC has started its formal rulemaking process and sought public comments. Normally, that‘s a process that could extend a couple of years, but Selig is currently the lone member of what’s meant to be a five-member commission, so he can act quickly without having to consult with others.

Preiserowicz estimated that the agency could finish a final rule before the year is out.

In the meantime, to get ahead of the insider-trading elements, Davis said some clients are already addressing the question: Do we need new confidentiality duties to formally identify employees who will be insiders in this betting realm？

“The CFTC is going to have its regulatory framework in there, and I think the protections are trying to come into place with the platforms themselves,” Davis said. Like the crypto industry, she said, prediction markets are “just going to keep on continuing to grow and actually become more institutionalized.”

In a current ad blitz on the streets and public transportation in Washington, D.C., Kalshi has been reminding the public that it wont tolerate market abuse, saying in one of the advertisements, “RULE #1, KALSHI BANS INSIDER TRADING, Because Kalshi is a federal regulated U.S. exchange.” But despite the firms emphasizing their own anti-insider-trading policies, government officials have begun taking matters into their own hands.

In California, Governor Gavin Newsom has pursued a statewide policy to ban government officials there from making prediction market trades on topics they have inside information on.

Representative Seth Moulton, a Massachusetts Democrat, isnt waiting for legislation, having banned his own staff from participating in prediction markets that involve matters that may come before them.

“My office has not, and will not, engage in these trades that run counter to every principle of a clean, honest government that works for the people,” he said in a statement last week. “I will always hold myself and my team to the highest ethical standards, and I call on every single American elected official to do the same.”