Two major prediction market platforms, Kalshi and Polymarket, are under intense scrutiny for insider trading and market integrity issues, sparking regulatory and community debate. Kalshi, a regulated prediction market, is preparing to publicly disclose a wave of disciplinary actions against users after clearing a "backlog" of suspicious trades, while decentralized platform Polymarket faces an impending insider trading exposé from prominent on-chain investigator ZachXBT.
Robert DeNault, Kalshi's Head of Enforcement and a former White & Case associate, told Decrypt that his first few months were spent sifting through this backlog of potential trading violations. "We're going to continue to post these, [...] but you’ll see it start in the coming weeks," DeNault stated. The company's CEO, Tarek Mansour, revealed that several cases have been referred to law enforcement, and their surveillance system, Poirot, has conducted over 200 investigations.
The crackdown comes amid growing skepticism fueled by high-profile betting patterns, such as a $400,000 payout linked to the capture of Venezuelan President Nicolás Maduro last month. This has prompted legislative action, with Rep. Ritchie Torres (D-NY) introducing a bill to prevent Kalshi and its peers from allowing insiders to profit. DeNault emphasized that Kalshi is professionalizing its disciplinary framework to mirror traditional exchanges like the NYSE or Nasdaq, focusing on policing "source agency" trading where traders affiliated with a contract's resolution entity are barred from the market.
Simultaneously, the decentralized prediction market Polymarket is bracing for a major investigation. On-chain analyst ZachXBT announced plans to expose insider trading activities at an anonymous crypto firm on February 26, 2025, with the cryptocurrency community strongly speculating the target is Polymarket. Evidence cited includes past bets on Google search predictions, Super Bowl halftime show outcomes, wagers on Maduro's arrest, and documented cases of individuals using military intelligence for trading advantages.
Adding to the speculation, Polymarket created a prediction market about ZachXBT's exposé but excluded itself as a betting option despite user requests. The platform has historically dismissed insider trading concerns as inherent to prediction markets, arguing information advantages occur naturally. However, legal experts note that using non-public information for financial gain typically violates securities laws.
The regulatory landscape for prediction markets remains complex and fragmented. While Kalshi operates under U.S. regulatory oversight, the CFTC is reportedly losing enforcement muscle as attorneys leave its Chicago office. Chair Mike Selig has signaled a move toward an AI-driven "minimum effective dose of regulation." Globally, approaches vary from the SEC's enforcement-focused stance in the U.S. to the EU's MiCA framework and Singapore's sandbox approach.
DeNault strongly rejected arguments that insider trading is a beneficial feature of prediction markets, calling such discourse "mind-numbing." He argued, "I don't understand how anybody... can, with a straight face, argue that that type of trading that violates a legal duty and violates the law is a positive benefit in a market." He illustrated Kalshi's broad interpretation of "legal duty" using the example of Super Bowl halftime show staff, like background performers dressed as bushes, who likely signed confidentiality clauses.
The cumulative trading volume on Kalshi has reached roughly $42.7 billion, with $6.8 billion generated this month alone, heavily influenced by Super Bowl markets. The outcomes of these integrity investigations and enforcement actions are poised to significantly impact the credibility, regulatory treatment, and future adoption of prediction markets within the cryptocurrency and broader financial ecosystem.
