Key Takeaways:
A Bank of America report showing federally regulated Kalshi now commands 89% of the U.S. prediction market has intensified a high-stakes legal battle between the CFTC and individual states over who controls the burgeoning industry.
Prediction markets in the United States are rapidly consolidating, with federally regulated exchange Kalshi now controlling 89% of the sector’s volume, according to a Bank of America report. The growth comes as the Commodity Futures Trading Commission (CFTC) escalates its legal fight to assert exclusive jurisdiction, suing multiple states that are attempting to regulate the platforms as a form of gambling.
"Prediction markets are exactly one thing where there’s overlapping jurisdiction potentially," SEC Chairman Paul Atkins said in February, noting the contracts may fall under SEC oversight if structured like securities. Meanwhile, Jay Clayton, the US Attorney for the Southern District of New York, has warned his office expects to bring fraud cases, stating that "just because it’s a prediction market doesn’t insulate you from fraud."
The market dynamics show a clear shift toward regulated entities. Kalshi’s weekly volume grew 6%, while crypto-native rival Polymarket, which faces U.S. restrictions, saw its volume fall 16%, the BofA report said. Kalshi's 89% market share dwarfs Polymarket's 7% and Crypto.com's 4%. This consolidation reflects a deeper tension over whether these event-based contracts are financial derivatives, as the CFTC argues, or simply a form of gambling subject to state law.
The outcome of the jurisdictional fight will determine the industry's future. A victory for the CFTC would create a single federal framework, allowing platforms like Kalshi to scale nationally. A loss would fragment the market into a state-by-state regulatory patchwork akin to sports betting, likely slowing growth and innovation while potentially leaving crypto-based platforms like Polymarket operating in a gray area.
The CFTC has become the primary regulator, identifying event contracts as "swaps" or "derivatives" under the Commodity Exchange Act. The agency has prohibited insider trading in these markets under CEA Section 6(c)(1) and Regulation 180.1, although it has yet to bring an enforcement action. In a recent statement, the commission reaffirmed it “has full authority to police illegal trading practices” and “will investigate and prosecute violations.”
This stance has put the CFTC in direct conflict with several states. The agency filed an amicus brief arguing for its exclusive federal jurisdiction and, on April 2, sued Arizona, Connecticut, and Illinois to block them from applying state gaming laws. The legal pressure is mounting, with a federal appellate court affirming on April 6 a preliminary injunction that prevents New Jersey from enforcing its gambling laws against Kalshi, citing likely preemption by federal authority.
The Department of Justice and the Securities and Exchange Commission are also signaling increased interest. The DOJ has brought two recent cases involving the misuse of material nonpublic information (MNPI) in "prop bets," which are similar to prediction market wagers. The SEC and CFTC have also announced they will meet regularly to coordinate on overlapping issues, including prediction markets.
The growth of these markets introduces significant compliance risks for companies and their employees. Financial firms are particularly exposed, as employees with access to confidential information could face liability for insider trading. Scenarios include an investment bank employee betting on a deal’s outcome, a prime brokerage employee using knowledge of large trades to bet on price movements, or a fund analyst betting on a credit downgrade they learned about in confidential meetings.
Under CFTC Rule 166.3, institutions have a duty to supervise their employees' activities in commodity interests. Some platforms are taking proactive steps. Kalshi announced it closed two internal enforcement cases, including one involving a political candidate trading on his own candidacy, and reported them to the CFTC. Polymarket recently implemented new rules barring trades on stolen confidential information or by those who can influence an event's outcome.
Companies are being advised to review their existing insider trading policies and surveillance tools to ensure they cover the risks associated with prediction markets. As the regulatory landscape solidifies, the onus will be on firms to adapt their compliance frameworks to this new and expanding financial frontier.
This article is for informational purposes only and does not constitute investment advice.
