In the US midterm elections on November 3, the Democratic Party won both the House and Senate. Even before the official results were announced, prediction market platforms Kalshi and Polymarket had already designated a Democratic sweep of both chambers as a highly probable event.

Kalshi officially stated that the transaction volume related to the midterm elections exceeded $2.5 billion, approximately double the entire election cycle for 2024. Kalshi CEO stated that the platform's popular candidates emerged victorious in 479 out of the 487 elections with results, constituting about 98%.

For prediction markets, this was supposed to be another highlight moment following the World Cup, but the successful predictions soon became the target of the winning side.

According to a report by Politico, longtime critic of prediction markets, Democratic Senator Jeff Merkley stated that after regaining control of Congress, the time has come to push for legislation to constrain such bets. Maxine Waters, who is vying for the chair of the House Financial Services Committee, also pledged to address predatory platforms, including prediction markets.

In fact, the resistance to this industry began even before the elections. From Apple to Hollywood studios, numerous companies have recently prohibited employees from betting using insider information; several states have already sued Kalshi, with lawsuits escalated to the Supreme Court.

Why has this rapidly growing industry, supported by the Trump administration, become a target in just two years? What will the Democratic takeover of Congress bring to it?

Prediction markets enter the trillion-dollar era, regulatory boundaries remain unresolved

The expansion rate of prediction markets has been astonishing this year. According to Artemis data, the industry's weekly trading volume at the beginning of the year was about $5 billion, and by the end of October, it had risen to over $30 billion. The trading volume for October reached $123.3 billion, surpassing the trillion-dollar mark for the first time, with Kalshi accounting for about 80%.

Valuations have also skyrocketed. On October 29, Kalshi announced it completed $1 billion in funding at a $40 billion valuation, led by Sequoia Capital and Wellington Management.

According to a September 1 report by The Wall Street Journal, Donald Trump Jr., partner at the investment firm 1789 Capital, plans to invest an additional $300 million in Polymarket as part of a $1 billion funding round led by 1789 Capital, which would give Polymarket an estimated valuation of about $21 billion if completed.

On the regulatory front, two years ago, election contracts in the US were still in a gray area. Kalshi only obtained permission to launch related markets through litigation in the fall of 2024, while Polymarket was barred from serving US users due to a settlement with the CFTC in 2022.

After the Trump administration took office, the winds shifted. Regulatory agencies became supportive of prediction markets, clearing obstacles for their expansion in politics, sports, and stocks. Polymarket also returned to the US market through a subsidiary holding a CFTC license.

Currently, prediction markets are regulated at the federal level by the CFTC. Both Kalshi and Polymarket operate as designated contract markets under the CFTC, and when launching new contracts, they can self-certify to the CFTC without prior approval. Polymarket's overseas main site is not subject to US regulation and, according to the 2022 settlement agreement, cannot open to US users.

At the state level, sports betting is managed according to state laws. The disagreement between the two sides lies in whether sports event contracts fall within the exclusive jurisdiction of the CFTC as financial derivatives or should be governed by state law as betting activities. To date, there has been no definitive ruling from federal courts, and at least 15 states have proposed legislation related to prediction markets.

However, there is currently only one sitting commissioner, Chair Michael Selig, out of five positions at the CFTC. According to CNBC, some lawmakers are concerned whether this agency, which has just experienced layoffs, can handle the rapidly expanding market.

Insider trading and disguised gambling, the cost of growth begins to surface

As trading volumes continue to grow, two types of issues are emerging.

The first is insider trading. Prediction markets allow betting on almost any event, giving those who possess insider information a natural advantage, while weak regulation makes it easy to monetize this advantage.

The most emblematic case occurred this April. The US Department of Justice charged Army Special Forces Sergeant Gannon Ken Van Dyke, accusing him of conspiring to capture Venezuelan President Nicolás Maduro in January and using classified information to bet about $33,000 on Polymarket, profiting over $400,000. This marked the first time the Department of Justice brought criminal charges for insider trading related to prediction markets.

Similar suspicious trades are not isolated instances. The US research organization ACDC's statistics revealed structural reasons behind this. In the congressional election market on Polymarket's overseas site, the top 1% of wallets accounted for about 70% of the transaction volume, with about 80% of market participation wallets having fewer than 100. The number of markets is increasing, but each market becomes thinner, allowing a few informed individuals to significantly influence prices.

The second issue is disguised gambling. Kalshi, holding a CFTC license, provides sports event contracts even in many states where sports betting is not yet allowed. States argue that this is a way to circumvent state law regulation and corresponding taxes by using financial derivatives as a guise.

Ordinary users are paying the price,Galaxy Research analyst Will Owens studied about 2.9 million manually traded accounts on Polymarket’s overseas site and found that 69.2% ultimately lost, with total losses around $339 million. The profit rate for traders focused on sports was only 25.1%, the lowest among all fields; traders concentrating on technology and science had the highest profit rates, with the report suggesting that some of them might possess insider information.

Owens also pointed out that both platforms spend heavily on marketing, attracting precisely the group with the worst profit performance. According to Front Office Sports, Polymarket pays LeBron James $15 million annually to promote football-related prediction markets.

These two types of issues point to the same outcome. In this market, returns flow to the few with more information, while the risks fall on the ordinary players attracted by marketing.

Unable to wait for legislation, all parties have cast opposing votes in advance

Problems continue to accumulate, and voices of opposition emerged from various parties even before the elections. The first to speak out were the public,Reuters and Ipsos released a poll in October showing that most US respondents believe betting on real events in prediction markets is gambling, with over 60% opposing betting on election outcomes.

Within the government, on October 20, US Secretary of Defense Pete Hegseth issued a memo banning Defense Department personnel from betting using classified or non-classified non-public information, specifically naming Kalshi and Polymarket. He warned that enemies are also watching the fluctuations in these markets. This ban comes from within an administration that generally supports prediction markets, carrying significant weight. Both Apple and Hollywood studios subsequently issued similar bans to employees before and after the elections.

The strongest opposition comes from the states. The Attorney General of Utah filed felony charges against Kalshi and its two co-founders, Oregon sued Kalshi to recoup taxes, and a federal judge in California approved a tribal application to prohibit Kalshi from offering sports contracts on the tribe's territory.

The lawsuits between the states and Kalshi eventually reached the Supreme Court. In April this year, the Third Circuit Court of Appeals ruled that the CFTC has exclusive jurisdiction over sports contracts, supporting Kalshi; in August, the Ninth Circuit Court of Appeals made the opposite ruling in a case from Nevada. On September 2, New Jersey filed a motion with the Supreme Court to obtain records based on this.

Supreme Court records show that there are already 11 amici curiae briefs supporting New Jersey, submitted by 39 states led by Ohio and Washington D.C., 145 Indian tribes and tribal organizations, the NFL, and former CFTC Chairman Gary Gensler and former Senator Christopher Dodd. Notably, Dodd is one of the authors of the Dodd-Frank Act of 2010, which greatly expanded the CFTC's regulatory power over derivatives.

Democratic victory intensifies pressure, the real variable lies with the Supreme Court

The Democratic victory has added another force from Congress to this siege. However, scrutiny from Congress over prediction markets had already begun during the Republican control of Congress.

In May this year, House Oversight Committee Chairman, Republican James Comer, initiated an investigation into insider trading issues in prediction markets, demanding that Polymarket and Kalshi explain how they identify unusual trading patterns.

After the Democratic takeover, this type of oversight will only intensify, and it will carry an additional layer of political motivation. Donald Trump Jr. also serves as an advisor to both Kalshi and Polymarket, and the investment firm he is part of, 1789 Capital, has invested in Polymarket. Politico believes that the Democratic scrutiny of prediction markets may become a window to observe how they respond to Trump family-associated businesses.

However, turning oversight into legislation is not easy. The bill proposed by Merkley and Representative Jamie Raskin in March of this year seeks to prohibit betting on events such as elections, sports, wars, and government actions. Even if such a bill passes through both chambers, Trump could still exercise veto power.

Aaron Klein, a senior fellow at the Brookings Institution, believes that the hard constraints of legislation are often overestimated, while the soft constraints of hearings and investigations are frequently underestimated. Congress cannot replace Selig, but it can exert pressure through hearings and attach clauses in appropriations bills to restrict the CFTC from using funds for litigation or to formulate new regulations.

These soft constraints are significant because the CFTC's own position is not singular. On one hand, it has sued Utah, Kentucky, and 10 other states to defend its exclusive jurisdiction over sports contracts.

On the other hand, it has filed a civil suit against Van Dyke and, according to Reuters, is re-investigating whether Polymarket violated the 2022 settlement agreement that prevented it from opening its overseas main site to US users. What the CFTC truly protects is the logic of federal jurisdiction and licensed operating models.

If Congress restricts the CFTC's budget for litigation, it might also lose its confidence in competing with the states. Should the Supreme Court accept New Jersey’s case and support the states, the logic of federal jurisdiction that supports Kalshi's expansion across the US will be directly shaken.

Kalshi was initially scheduled to file its defense on November 9, but the Supreme Court has approved an extension until December 7. Following this timeline, the Supreme Court will likely not decide whether to hear the case until early next year.

Prediction markets may become the next cryptocurrency industry?

Politico cited a former Wall Street regulator's comment that in the Democratic congressional agenda, prediction markets may become the next cryptocurrency industry.

The cryptocurrency industry once experienced rapid expansion in a rule-free environment, followed by repeated pulls amidst law enforcement pressure and legislative struggles.

Now, prediction markets find themselves at a similar crossroads, with growth continuing, costs becoming evident, and opposition extending from businesses and states to Congress and the Supreme Court.

For an industry capable of accurately predicting elections, perhaps the hardest outcome to predict is its own regulatory fate.