When will oil tanker traffic return to its normal volume in the Strait of Hormuz? Will Elon Musk buy Ryanair? Who will win Season 22 of The Bachelorette?
You can bet on these questions and thousands of others on prediction markets, such as Polymarket or Kalshi. These platforms are a cross between sports gambling and the stock market, allowing ordinary people to place bets on real-world outcomes. But, as in both of those ventures, the opportunity to cheat offers lucrative temptations. Except in the real world, throwing a game can have devastating consequences.
With financial incentives for correctly predicting an event, prediction markets may incentivize people to take action solely for the purpose of a payout. For example, predicting the death of a world leader could lead to his assassination. Or, at the very least, prediction markets could lead decision-makers to tip off friends about an impending action so that they can place a bet and collect their winnings. According to Senator Jeff Merkley, an Oregon Democrat who has proposed regulating the industry, “Perfectly timed bets on prediction markets have the unmistakable stench of corruption.”
Indeed, in recent months, bets on specific events have been remarkably prescient. In January, a Polymarket user won $400,000 by betting that President Nicolás Maduro of Venezuela would fall from power. In February, more than 150 accounts on Polymarket correctly predicted the American military strike on Iran, betting a collective $855,000. The accuracy of these bets has sparked concern that people entrusted with sensitive information may be leaking to their friends in order to cash in. In addition to undermining the integrity of the prediction market, these disclosures could compromise the operations themselves.
As a result, federal prosecutors in Manhattan have been exploring the potential application of insider trading laws and other statutes to prediction markets. Jay Clayton, the U.S. Attorney for the Southern District of New York, recently told the audience at a securities law conference that he expected to see criminal cases in the prediction market industry.
Insider trading is usually charged under the statute that prohibits securities and commodities fraud. That statute, 18 U.S.C. 1348, makes it a crime to knowingly execute or attempt to execute a scheme to defraud in connection with the delivery of a security, like stock, or a commodity, like soybeans. Although commodities were originally thought of as tangible things like pork bellies and copper, the U.S. Commodity Futures Trading Commission (CFTC) requires prediction markets to comply with its rules. Consequently, an inside tip about the likelihood of an event could constitute fraud under the statute, a violation of which is punishable by up to 25 years in prison.
Of course, the unusual nature of the prediction markets industry makes it an odd fit under the statute. As explained by Aitan Goelman, the former director of enforcement at the CFTC, “Prosecutors would have to show not only that someone was trading in possession of material nonpublic information, but they were doing it in violation of some kind of fiduciary duty or duty of trust. But all this is untested.” In addition to those legal hurdles, marketplaces that operate outside the United States may pose jurisdictional challenges for prosecutors, even though American bettors can access these offshore markets through the Internet.
Prosecutors may look to other statutes to address fraud in prediction markets. Online sports gambling, which has exploded since the Supreme Court’s 2018 decision overturning a legal ban, offers some guidance. In recent years, we have seen the rise of the “prop bet,” short for proposition. Rather than betting on the outcome of a game, prop bettors will wager on whether Matthew Stafford will pass for more than 150 yards in the first half or whether Steph Curry will score more than 12 points in the third quarter. Because a player can control the outcome, it is susceptible to cheating. Last November, Cleveland Guardians pitchers Emmanuel Clase and Luis Ortiz were charged with wire fraud for allegedly rigging prop bets on the type of pitches they would throw to certain batters during games. According to a federal indictment, betters would use advance information from Clase and Ortiz to place sure-thing wagers and collect thousands of dollars in gambling winnings. The pitchers would receive bribes or kickbacks in exchange. The wire fraud statute requires a scheme or artifice to defraud and a wire transmission in furtherance of the scheme. The wire transmission can be as simple as a text message.
If current statutes regulating commodities prove a poor fit to address the harms caused by insider trading in prediction markets, new laws may be necessary to save prosecutors from trying to ram a square peg into a round hole. It may, however, be difficult to get the president to sign such legislation. Donald Trump Jr. is a paid adviser to Kalshi and an investor in Polymarket. And the president’s Trump Media and Technology Group is developing its own platform called Truth Predict.
Perhaps we will see a legal crackdown on prediction markets. But during the Trump administration? Don’t bet on it.
