(Originally published by Stanford Report on April 28, 2026.)

Prediction markets – online platforms where users bet on future events – are surging in popularity and facing scrutiny amid reports of market manipulation and insider trading.

Just last month, a soldier in the U.S. Special Forces placed a wager using classified information about the imminent removal of Venezuelan leader Nicolas Maduro – earning him over $400K and an arrest for using highly sensitive information for personal gain.

Federal agencies are now weighing in on how to regulate prediction markets, with critical questions looming.

Here, Joseph Grundfest, a former SEC commissioner and a Stanford legal scholar who has spent decades studying capital markets, corporate governance, and securities litigation, answers four questions about what distinguishes prediction markets from online gambling, where they are vulnerable to exploitation, and the regulatory hurdles that lie ahead.

Grundfest is the W.A. Franke Professor of Law and Business, Emeritus, at Stanford Law School (SLS) and is also a senior faculty member with the Arthur and Toni Rembe Rock Center for Corporate Governance.

What’s behind the recent surge in prediction markets?

Money.

How are prediction markets different from online gambling, and why does the distinction matter?

The answer depends entirely on whom you ask. Kalshi and Polymarket, the primary online event markets, claim their markets are fundamentally different from traditional gambling because there is no “house” that sets the odds and acts as the counterparty to all positions. Instead, prediction markets are structured more like traditional futures markets in which no wager exists unless a person on one side of the market is willing to do business with a person on the other side. The market sets the odds in the Kalshi and Polymarket models, not the casino, or “the House.” The states respond that this is a distinction without a difference because the end result is functionally indistinguishable from a traditional sports betting market.

States like New Jersey and Washington contend that Kalshi’s sports-indexed markets are not legitimate contract markets of the sort that Congress intended to regulate under the Commodities Exchange Act (CEA). They urge that the CEA regulate financial and commercial contracts, contracts relating to interest rates, or currency prices, not traditional sports betting contracts that are “dolled up” to look like financial instruments. In response, the markets point to the CEA’s very broad definitional language and assert that sports contracts clearly fall within those definitions.

There is also a constitutional dimension. The markets argue that the statute’s broad language supports field and conflict preemption. If that’s right, then Commodity Futures Trading Commission (CFTC) regulation preempts all state wagering regulation. The states counter with a version of the “major questions” doctrine, asserting that if Congress intended to preempt decades of state gambling regulation, it would have said so more clearly. The growing consensus expects a circuit split and that the matter will ultimately be resolved by the Supreme Court.

What makes prediction markets vulnerable to insider trading?

The precision of some of the contracts offered on these markets amplifies insider trading risk. We all know about point shaving in basketball. A gambler bribes a player to underperform and profits either by betting the team will lose, or by betting that the individual player will underperform through an instrument known as a “prop bet” – a bet, for example, tied to an individual player’s performance, not the outcome of the team game. Those “prop bets” are easier to manipulate.

Prediction markets proliferate contracts similar to prop bets in that they are related to highly specific outcomes that can be easily manipulated.

Prediction markets also proliferate contracts on “micro-decisions” that are more directly related to very specific forms of knowledge. Two years ago, if you were a government official or military officer with knowledge of the plan to “extract” Maduro from Venezuela, or of the attack on Iran, there were simply no markets on which you could easily attempt to trade on that very specific form of information. Today, you can make hundreds of thousands of dollars by misappropriating that information by trading event contracts.

What would meaningful oversight actually look like?

That’s a tough one. Ideally, we would replicate the systems that the SEC uses to monitor against insider trading in U.S. equity markets, but the real problems arise offshore and in crypto-native event markets. In particular, Polymarket is crypto-native, does not apply U.S.-style anti-money laundering or know-your-customer rules, and is technically closed to participation by U.S. persons. All that said, U.S. persons do use virtual private networks and other techniques to trade on Polymarket, and most of the troubling leaks related to national security events have appeared on Polymarket, not Kalshi, because of the relative ease of remaining anonymous.