Original Author: Sander Lutz, Decrypt
Original Translation: Felix, PANews
Late last week, the biggest gambling scandal in recent years shook the sports world. At this moment, professional leagues and sports betting companies expressed their intention to actively embrace the booming prediction markets, raising questions about whether this combination could lead to foreseeable consequences.
On October 23, NBA Portland Trail Blazers head coach Chauncey Billups and Miami Heat guard Terry Rozier were arrested in a federal investigation into illegal gambling activities, including manipulating game outcomes to influence sports betting.
Just a day earlier, the National Hockey League (NHL) made history by becoming the first major sports league to sign a licensing agreement with a prediction market. Prediction markets are emerging and popular betting sites that have sparked a frenzy in the traditional sports betting arena, but their operations exist in a legal gray area. On the same day, one of the most popular sports betting sites in the U.S., DraftKings, acquired a prediction market company, making a strong entry into this emerging field.
Now, as federal law enforcement focuses on insider trading in sports betting, some experts are increasingly concerned about the shift from sports betting to prediction markets, while others believe that when these betting platforms utilize public blockchain networks, they will provide more transparency.
Former government regulators and legal experts say that the transition to prediction markets could make the already daunting task of regulating sports betting even more difficult and lead to rampant misconduct in sports-related betting.
Prediction markets allow users to purchase financial rights to the outcome of an event through futures contracts, and these markets are regulated by the Commodity Futures Trading Commission (CFTC), a federal regulatory agency that has little experience regulating professional sports. For most of its 50-year history, the agency has passively regulated the trading of agricultural derivatives like soybean and livestock futures.
Today, the agency is not only preparing to regulate the rapidly expanding sports prediction markets but is also gearing up to regulate most cryptocurrencies, largely due to the active push from the Donald Trump administration.
An anonymous former CFTC official stated that the agency is not only much smaller than other financial regulatory bodies but has also significantly downsized this year, rendering it incapable of regulating the cryptocurrency or sports betting industries, let alone regulating both simultaneously.
"I believe the U.S. CFTC will be absorbed. Cases of insider trading in prediction markets will increase because the CFTC is not regulating — they do not have enough personnel to discover these behaviors on their own."
Due to its size and historical mission, the regulatory agency primarily relies on whistleblowers and proactive reporting from market participants to eliminate corruption in its regulated markets. It does not actively seek out insider trading behaviors, and in the sports market, it cannot do so without significantly increasing personnel and funding.
Such changes seem unlikely in the short term. This year, the leadership of the U.S. CFTC has been working to permanently downsize the agency. Earlier this month, Brian Quintenz, the agency head nominee put forward by President Trump, had his candidacy stalled this summer due to conflicts with cryptocurrency executives Tyler Winklevoss and Cameron Winklevoss. The two expressed strong opposition to many of Brian Quintenz's plans, including increasing the CFTC's budget.
The billionaire twin brothers (Tyler Winklevoss) believe that expanding the agency's regulatory capacity would lead to "regulatory capture" (a form of political corruption).
Gambling and sports betting legal expert Daniel Wallach stated that compared to existing state-level sports betting regulations, the U.S. CFTC's ability to regulate sports markets is inadequate. State laws require stakeholders to proactively combat insider trading and collaborate with law enforcement and third-party integrity monitoring companies.
"In contrast, the CFTC does not have sports-related regulations targeting such activities." "These companies essentially have to self-certify their event contracts and self-regulate their integrity."
In the past year, the prediction business has flourished. Prediction markets allow users to make financial bets on almost anything — from sports and politics to cryptocurrencies and cultural events. Last Monday, the weekly trading volume of the four major prediction markets — Kalshi, Polymarket, Limitless, and Myriad — reached a record $2 billion.
A frequently cited Certuity report estimates that the prediction market industry could be worth $95.5 billion by 2035, with a compound annual growth rate of 46.8%. Polymarket and Kalshi currently hold about 96% of the market share, with recent funding rounds valuing the two companies at $9 billion and $5 billion, respectively.
Kalshi is currently the largest prediction market offering sports events in the U.S. A spokesperson for the company stated that an internal system has been established to identify suspicious trading activities to meet U.S. CFTC requirements. The company also mentioned that it has partnered with an integrity monitoring company, IC360.
The spokesperson added, "Insider trading is a harmful activity and is explicitly prohibited on Kalshi."
However, legal expert Daniel Wallach believes that companies like Kalshi are effectively left to their own devices in the absence of the U.S. CFTC's apparent attempts to adjust its regulatory approach to accommodate the sports market, which alters the power balance between platforms and regulators, contrasting sharply with the existing situation in traditional sports betting.
"These profit-driven enterprises operate in a regulatory vacuum, setting their own policies, and their trading capabilities in this area are unrestrained and unbounded." "Game manipulation and insider trading have existed since the inception of sports events, and there are no rules to hold these companies accountable."
Top scholars studying prediction markets indicate that these platforms not only fail to curb insider trading but are, in principle, designed to support it. Robin Hanson, a professor at George Mason University and a recognized authority in the field of prediction markets, stated in an interview last October: "If the purpose of prediction markets is to obtain accurate information about prices, then you definitely want to allow insiders to trade, even if it makes others reluctant to bet, as it will make prices more accurate."
While prediction markets may present new challenges for regulating misconduct in sports betting, some believe they also offer new opportunities to combat insider trading.
Although Kalshi does not use cryptocurrencies in its daily operations, its main competitor Polymarket does — supporters argue that this reliance brings greater transparency.
RedStone is an oracle network that prediction markets can utilize to verify information and settle bets. The network's co-founder, Marcin Kazmierczak, stated that since all transactions on platforms like Polymarket are publicly visible on the blockchain ledger, this setup makes it easier to identify suspicious trading activities.
"Relying solely on this transparency does not eliminate insider trading, but it enables large-scale and rapid detection, which traditional systems cannot match."
Coinbase Chief Legal Officer Paul Grewal hinted that on-chain prediction markets are better at preventing crimes like last week's NBA betting scandal than traditional betting platforms.
In fact, in recent months, observers have noted several instances of suspicious timing of trades on Polymarket. Notably, earlier this month, users on the site seemed to accurately predict the Nobel Prize winners just hours before the announcement, prompting Norwegian officials to launch an internal investigation.
However, after this insider trading was exposed, Polymarket did not announce its own investigation into the Nobel Prize market, nor did the company issue any statements condemning insider trading.
Instead, Polymarket's X account retweeted a news article about the situation, further leveraging this potential scandal to promote its product.
"Breaking news: It has been reported that only 5 people within the Nobel Peace Prize Foundation knew the winners before the announcement, while everyone on 'Polymarket' was already aware."
Polymarket plans to relaunch in the U.S. soon, having been forced to move overseas in 2022 for failing to comply with U.S. CFTC regulations.
Although Kalshi and Polymarket have slightly different public attitudes toward insider trading, they hold similar positions within the current political ecosystem in the U.S. Both companies have advisors who are the sons of President Donald Trump Jr.
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