Prediction markets first entered the cultural conversation when Polymarket, one of the leading players, accurately predicted a Donald Trump victory with 62% certainty in the 2024 US presidential election, despite conventional polls estimating that the race was an even split. Prediction markets allow users to bet on a whole host of questions, from the likelihood of Apple releasing a foldable iPhone, to the outcome of the Iran war, or the chance of Trump saying ‘six seven’ in a cabinet meeting.
The almost limitless spectrum of niche topics that users can bet on has fuelled the popularity of prediction markets like Polymarket and Kalshi, and trading on the markets increased by over 400% last year to almost $64 billion. However, the rapid growth of prediction markets has also given rise to questions about how they should be classified and regulated from a legal perspective, and different jurisdictions have adopted divergent approaches. This has created regulatory uncertainty, which is particularly problematic given the insider trading risks posed when individuals can make a lot of money by trading on the likelihood of highly specific events occurring.
Classification and Regulation: Financial Derivative or Gambling Product?
Prediction markets pose a regulatory problem because the way they operate puts them in a legal ‘grey zone.’ Event contracts have been variously classified as financial derivatives and gambling products. Functionally, prediction markets look like betting. However, structurally, they work based on a peer-to-peer exchange. Users on the platforms buy and sell event contracts, which are usually priced between 0.01 and 0.99 and have a ‘Yes’ or ‘No’ outcome. Each contract is linked to a clear underlying question, such as ‘Will Bitcoin reach $150,000 by the end of 2026?’ The price of the contract reflects the market’s assessment of the likelihood of the event occurring; for example, a contract priced at $0.60 suggests a 60% chance. If the event occurs, users who bought ‘Yes’ contracts receive $1 per contract (minus fees), and those who bought ‘No’ contracts receive nothing. If the event does not occur, the reverse is true.
In the US, in February 2026 the Commodity Futures Trading Commission (‘CFTC’) issued a statement claiming its exclusive authority ‘to police illegal trading’ on prediction markets. The CFTC’s position is that event contracts traded on prediction markets are swaps, which are defined in the Commodity Exchange Act as ‘any agreement, contract, or transaction that provides for any purchase, sale, payment, or delivery...dependent on the occurrence, nonconcurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.’
However, some US states have argued against the CFTC’s oversight, claiming that sports event contracts that users bet on using platforms such as Kalshi are not financial instruments, and therefore should fall under state gambling laws rather than the Commodity Exchange Act. In Kalshiex LLC v Flaherty (No 25-1922, 3d Cir, 6 April 2026) (Porter CJ), the United States Court of Appeal for the Third Circuit issued a 2-1 decision of first impression, concluding that event contracts are swaps, meaning that the Commodity Exchange Act takes precedence over state gambling laws. However, a related case is currently going through the US courts, and it is likely that the issue will go to the Supreme Court.
Outside of the US, the legal and regulatory framework is varied. In the UK, the Gambling Commission stated in February 2026 that prediction markets aimed at the public will be regulated as gambling products, not as specialist financial instruments. As such, prediction market operators fall within the purview of the Gambling Act 2005 and would require a Gambling Commission license to operate. The Financial Conduct Authority has also banned firms from selling, marketing or distributing binary options to consumers, describing them as ‘gambling products dressed up as financial instruments.’ Due to these legal restrictions, neither Kalshi or Polymarket serve UK users, and Polymarket geo-blocks UK IP addresses. In the EU, there is a large degree of regulatory ambiguity, although some EU countries such as France and Spain have banned the operation of prediction markets in their jurisdiction, classifying their activities as online illegal gambling. There is therefore a regulatory tension, whereby event contracts are largely being classified as financial derivatives in the US, and as gambling products outside the US.
Insider Trading Risks
Although prediction markets are currently banned in the UK and many EU member states, legal practitioners should be aware of the legal risks they pose and advise clients to take appropriate protective action. Insider trading is a particular risk in relation to prediction markets that practitioners should make their clients aware of. It is the level of specificity of the event contracts that can be entered into that uniquely opens prediction markets to abuse. For example, politicians could bet on their own candidacy, and employees could use insider knowledge to bet on the latest release of a product. The ongoing court case of Gannon Ken Van Dyke highlights the insider trading risks posed by prediction markets. Van Dyke, an army soldier, was arrested after allegedly making over $400,000 by using classified information to bet on the timing of the US military operation to capture Venezuelan President Nicolás Maduro.
Similarly, the timing of bets made on Polymarket before the US and Israel launched airstrikes on Iran raised suspicion of insider trading. Insider trading is not a new problem, but the niche nature of the event contracts that can be entered into using prediction markets opens the door to large scale abuse. In addition, the nature of some prediction markets can make oversight and enforcement difficult. Users may enter event contracts using anonymous or pseudonymous accounts, and some crypto-funded prediction markets pose anti-money laundering and know your customer concerns. This means that is can be much more difficult to gather evidence and enforce insider trading regulations on prediction markets.
What should legal practitioners advise their clients in relation to prediction markets?
Due to the clear insider trading threats posed by prediction markets, lawyers should support clients to take steps to mitigate their risk. Company compliance teams should be advised to re-evaluate their insider trading policies to ensure that they explicitly cover trading on prediction markets. Lawyers should advise clients to review their company policies to ensure that they cover the risk of tipping off; company policies should explicitly state that there may still be liability if an employee provides a tip off about a future event (for example, the date of a new product launch) to an unauthorised third party, even if they don’t themself trade on a prediction market and receive a benefit. Lawyers should work with clients to ensure that they have robust mechanisms to identify and report insider trading violations. Practitioners may also support their global clients by delivering up-to-date training for company employees that explicitly covers the legal risks of trading on prediction markets using non-public information.
Conclusion
Different jurisdictions have adopted divergent approaches to the classification and regulation of prediction markets. Against this regulatory ambiguity, legal practitioners should be aware of the insider trading risks posed by prediction markets and should support their clients to take appropriate steps to mitigate this risk. Appropriate protective measures include reviewing client insider trading policies and reporting mechanisms and working with clients to provide updated guidance and training to employees on the legal risks of prediction markets.
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