The Commodity Futures Trading Commission (CFTC) is pushing back against claims of rampant insider trading in prediction markets, while simultaneously battling U.S. states over who has the authority to regulate these platforms. The dispute has drawn support from venture capital giant Andreessen Horowitz (a16z), which has formally backed the CFTC's position in a comment letter.
CFTC Chair Mike Selig, speaking during his first 100 days in office, dismissed concerns about insider trading as overstated. He emphasized that the agency has strengthened its enforcement tools and has already pursued legal action against violators. According to Selig, the CFTC's antifraud framework aligns with federal law and remains effective. He warned that restricting prediction markets could push activity offshore, exposing financial data to foreign risks.
Legal experts, however, highlight significant hurdles in prosecuting insider trading in these markets. Jason Gottlieb of Morrison Cohen LLP noted that current rules require proving misuse of confidential information, a threshold many suspicious trades may not meet. Alison Anderson of Boies Schiller Flexner LLP pointed out the difficulty of defining material nonpublic information when prediction markets often involve widely shared or partial knowledge across large participant groups.
The jurisdiction dispute is escalating. The CFTC argues that prediction market contracts qualify as swaps under the Commodity Exchange Act, placing them under exclusive federal oversight. States such as Illinois, Arizona, Connecticut, New York, and Wisconsin counter that these markets resemble unlicensed gambling and fall under local laws. The CFTC has taken legal action against several states to assert its authority, while platforms like Kalshi and Crypto.com argue their products are regulated derivatives.
a16z has entered the fray with an 18-page comment letter submitted to the CFTC. The firm argued that state-level cease-and-desist orders and proposed bans disrupt market access and liquidity. "Being forced to deny impartial access to users in states that seek to license or prohibit certain event contracts will likely severely circumscribe available liquidity," the firm wrote. a16z also rejected the gambling framing, stating that the authority to define "gaming" in this context lies with the CFTC.
Beyond the regulatory argument, a16z positioned prediction markets as valuable tools for price discovery and probability assessment. The firm highlighted the transparency of blockchain-based platforms, stating that onchain transaction auditability improves monitoring for both participants and regulators. This framing aligns prediction markets more closely with financial derivatives than with gambling products.
Trading activity in prediction markets has surged, with cumulative lifetime volumes on leading platforms like Polymarket and Kalshi surpassing $150 billion. Monthly volumes continue to climb, driven largely by retail users—more than 80% of participants trade less than $10,000. Meanwhile, Polymarket is in discussions with the CFTC to regain access to U.S. users after a prior settlement required it to block domestic participation. The outcome of the federal-state dispute will determine whether this growth continues within a unified framework or becomes fragmented across jurisdictions.
