Author: Zhou, ChainCatcher
In the U.S. midterm elections on November 3, the Democratic Party swept both the House and the Senate. Even before the results were officially announced, prediction market platforms Kalshi and Polymarket had already rated a Democratic sweep of both chambers as the most likely outcome.
Kalshi said that trading volume in markets related to the midterm elections exceeded $2.5 billion, roughly twice the volume for the entire 2024 election cycle. The Kalshi CEO said that the platform's most popular picks won 479 of the first 487 elections with reported results, a rate of about 98%.
For prediction markets, this was meant to be another high point following the World Cup. But after correctly predicting the outcome, prediction markets soon became a target of the winning side.
According to Politico, Democratic Senator Jeff Merkley, a longtime critic of prediction markets, said the time had come to advance legislation restricting this kind of betting now that Democrats are retaking Congress. Maxine Waters, who is vying to chair the House Financial Services Committee, has also pledged to crack down on predatory platforms, including prediction markets.
In fact, pushback against the industry began well before the election. From Apple to Hollywood studios, several companies have recently banned employees from using insider information to place bets; multiple states had already taken Kalshi to court, and the case has reached the Supreme Court.
Why has an industry that grew rapidly with support from the Trump administration become a target for so many in just two years? And what will Democrats taking control of Congress mean for it?
Prediction markets enter the hundreds-of-billions era, while regulatory boundaries remain unresolved
Prediction markets have expanded at a staggering pace this year. According to Artemis data, weekly trading volume across the industry was about $5 billion at the start of the year, rising to more than $30 billion by the end of October. Total trading volume for October reached $123.3 billion, crossing the $100 billion mark for the first time, with Kalshi accounting for about 80%.
Valuations have surged along with trading. On October 29, Kalshi announced that it had raised $1 billion at a $40 billion valuation, in a round led by Sequoia Capital and Wellington Management.
According to a September 1 report by The Wall Street Journal, 1789 Capital, an investment firm whose partners include Donald Trump Jr., planned to invest an additional roughly $300 million in Polymarket as part of a roughly $1 billion funding round led by 1789 Capital. If completed, the deal would value Polymarket at about $21 billion.
On the regulatory front, election contracts were still in a gray area in the United States two years ago. Kalshi was not allowed to launch related markets until it won a lawsuit in the fall of 2024, while Polymarket was barred from serving U.S. users under a 2022 settlement with the CFTC.
The direction shifted after the Trump administration took office. Regulators have generally been supportive of prediction markets, clearing the way for their expansion into politics, sports, stocks, and other areas. Polymarket has also returned to the U.S. market through a subsidiary licensed by the CFTC.
At the federal level, prediction markets are currently regulated by the CFTC. Both Kalshi and Polymarket’s U.S. platform operate as CFTC-designated contract markets. When launching a new contract, platforms can certify it with the CFTC themselves without obtaining prior approval. Polymarket’s main offshore platform is not subject to U.S. regulation and, under the 2022 settlement, cannot be made available to U.S. users.
At the state level, sports betting is governed by each state’s laws. The disagreement is over whether sports-event contracts are financial derivatives subject to the CFTC’s exclusive jurisdiction, or betting activities that should be governed by state law. Federal courts have yet to resolve the issue, and at least 15 states have proposed legislation related to prediction markets.
However, only one of the CFTC’s five commissioner seats is currently occupied: Chairman Michael Selig. According to CNBC, some lawmakers are concerned about whether the agency, which has recently undergone layoffs, can handle a rapidly expanding market.
Insider trading and disguised gambling: the costs of growth begin to emerge
As trading volumes continue to grow, two kinds of problems are becoming increasingly apparent.
The first is insider trading. Prediction markets allow bets on almost any event, naturally giving people with inside information an advantage. Weak oversight makes it easy to turn that advantage into money.
The most striking case occurred this April. The U.S. Department of Justice charged Army Special Forces Master Sergeant Gannon Ken Van Dyke, alleging that he helped plan the January operation to capture Venezuelan President Nicolás Maduro and used classified information to place bets worth about $33,000 on Polymarket, earning more than $400,000. It was the Justice Department’s first criminal insider-trading charge involving a prediction market.
Suspicious trades like these are not isolated incidents. Data from the U.S. research organization Anti-Corruption Data Collective (ACDC) reveals the structural reasons behind them. In Polymarket’s offshore congressional election markets, the top 1% of wallets accounted for about 70% of trading volume, while 80% of markets had fewer than 100 participating wallets. As the number of markets keeps growing, individual markets are becoming thinner, making it possible for a small number of informed traders to move prices.
The second problem is disguised gambling. With its CFTC license, Kalshi offers sports-event contracts in many states where sports betting has not been legalized. States argue that this uses the guise of financial derivatives to sidestep state oversight and the associated taxes.
Ordinary users have paid the price. Galaxy Research analyst Will Owens studied about 2.9 million accounts on Polymarket’s offshore platform that traded at a human pace and found that 69.2% ultimately lost money, with combined losses of about $339 million. Only 25.1% of sports-focused traders made a profit, the lowest rate across all fields; technology- and science-focused traders had the highest profitability, and the report suggests that some of them may have had inside information.
Owens also noted that the two platforms spend heavily on marketing, attracting precisely the people with the worst trading outcomes. According to Front Office Sports, Polymarket pays LeBron James $15 million a year to promote its football-related prediction markets.
Both problems point to the same outcome. In this market, gains flow to a small number of better-informed people, while the risks fall on ordinary users drawn in by marketing.
Rather than wait for legislation, opponents have already cast their votes
As problems accumulated, opposition from various quarters emerged even before the election. The public was the first to speak out. A Reuters/Ipsos poll released in October found that most U.S. respondents considered betting on real-world events in prediction markets to be gambling, and more than 60% opposed betting on election outcomes.
Within the government, on October 20, U.S. Defense Secretary Pete Hegseth issued a memo prohibiting Defense Department personnel from betting using classified or unclassified nonpublic information, naming Kalshi and Polymarket in the document. He warned that adversaries were also watching movements in these markets. The ban carries particular weight because it comes from within the Trump administration, which has generally supported prediction markets. Around the election, Apple and Hollywood studios also issued similar bans to their employees.
The states have been the most forceful opponents. Utah’s attorney general brought felony charges against Kalshi and its two co-founders; Oregon sued Kalshi and sought to recover taxes; and a federal judge in California granted a tribal request to bar Kalshi from offering sports contracts on the plaintiffs’ tribal lands.
The states’ legal battles with Kalshi ultimately reached the Supreme Court. In April this year, the Third Circuit Court of Appeals ruled that the CFTC had exclusive jurisdiction over sports contracts, siding with Kalshi. In August, the Ninth Circuit Court of Appeals reached the opposite conclusion in a case from Nevada. On September 2, New Jersey cited the split in asking the Supreme Court to issue a writ of certiorari.
Supreme Court records show that 11 amicus briefs have been filed in support of New Jersey. The filers include a coalition of 39 states led by Ohio and the District of Columbia; 145 Native American tribes and tribal organizations; the NFL; and former CFTC Chairman Gary Gensler and former Senator Christopher Dodd. Dodd was one of the authors of the 2010 Dodd-Frank Act, which greatly expanded the CFTC’s authority to regulate derivatives.
Democratic victories increase the pressure, but the Supreme Court is the real wildcard
The Democratic victories have added another force from Congress to the pushback against prediction markets. But congressional scrutiny of prediction markets actually began while Republicans controlled Congress.
This May, House Oversight Committee Chairman and Republican James Comer launched an investigation into insider trading in prediction markets, demanding that Polymarket and Kalshi explain how they identify suspicious trading.
After Democrats take control, this kind of oversight is likely to intensify—and gain an added political dimension. Donald Trump Jr., the president’s eldest son, is an adviser to both Kalshi and Polymarket, and his investment firm, 1789 Capital, has also invested in Polymarket. Politico says Democratic scrutiny of prediction markets could offer a window into how the party will deal with companies linked to the Trump family.
But turning oversight into legislation is no easy task. A bill introduced in March by Merkley and Representative Jamie Raskin would ban betting on events such as elections, sports, wars, and government actions. Even if such a bill passed both chambers, Trump could still use his veto power.
Aaron Klein, a senior fellow at the Brookings Institution, says the hard constraints imposed by legislation are often overestimated, while the soft constraints of hearings and investigations are often underestimated. Congress cannot remove Selig, but it can apply pressure through hearings and attach provisions to appropriations bills restricting the CFTC from using funds for lawsuits or new rulemaking.
These soft constraints matter because the CFTC itself does not have a single, unified position. On the one hand, it has sued 10 states, including Utah and Kentucky, to defend its exclusive jurisdiction over sports contracts.
On the other hand, it has filed a civil lawsuit against Van Dyke and, according to Reuters, is also reopening its investigation into whether Polymarket violated its 2022 settlement agreement by making its main offshore platform unavailable to U.S. users. What the CFTC is really defending is federal jurisdiction and a licensed operating model.
If Congress restricts the CFTC’s funding for lawsuits, the agency could lose the means to take on the states. If the Supreme Court takes up New Jersey’s case and sides with the states, the federal-jurisdiction argument that Kalshi has relied on to expand nationwide would be directly undermined.
Kalshi was originally scheduled to file its response on November 9, but the Supreme Court granted an extension until December 7. At this pace, the Supreme Court may not decide whether to take up the case until early next year.
Could prediction markets be the next crypto industry?
Politico quoted a former Wall Street regulator as saying that prediction markets could become the new crypto industry on the Democrats’ congressional agenda.
The crypto industry also expanded rapidly in an environment with few rules, then was repeatedly caught between enforcement pressure and legislative battles.
Prediction markets have now reached a similar crossroads. Growth continues, the costs have become clear, and efforts to rein them in have spread from companies and states to Congress and the Supreme Court.
For an industry that can bet on elections, its own regulatory fate may be the hardest thing to predict.