Originally Posted by Sander Lutz, Decrypt

Original translation: Felix, PANews

As the sports world was rocked late last week by one of the biggest betting scandals in recent memory, professional leagues and sportsbooks pledged to embrace the booming prediction markets, raising questions about whether the combination would have predictable 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 betting activities, including manipulating game results to influence sports betting.

Just the day before, the National Hockey League (NHL) made history by becoming the first major sports league to sign a licensing agreement with prediction markets. Prediction markets are a new and popular betting platform that has created a buzz in traditional sports betting, but operates in a legal gray area. That same day, DraftKings, one of the most popular sports betting sites in the United States, 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 in sports betting toward prediction markets, while others believe that these betting platforms provide more transparency when they utilize public blockchain networks.

Former government regulators and legal experts say the transition to prediction markets could make the already daunting task of regulating sports betting even more difficult and lead to an increase in improper conduct in sports-related betting.

Prediction markets, which allow users to buy a financial stake in the outcome of an event through futures contracts, are regulated by the Commodity Futures Trading Commission, a federal regulator with little experience overseeing professional sports. For most of its 50-year history, the agency has passively overseen trading in agricultural derivatives such as soybean and livestock futures.

Now, the agency is poised to regulate not only the rapidly expanding sports prediction market but also most cryptocurrencies, largely at the urging of Donald Trump’s administration.

An anonymous former CFTC official said that the agency is not only much smaller than other financial regulators, but has also made significant staff cuts this year and is simply unable to regulate the cryptocurrency or sports betting industries, let alone both industries at the same time.

“I think the CFTC will be swallowed up. There will be more and more cases of insider trading in the prediction markets because the CFTC is not policing it – they don’t have enough staff to detect it on their own.”

Because of its size and historical mission, the regulator relies primarily on whistleblowers and proactive reporting by market participants to root out corruption in the markets it oversees. It does not proactively search for insider trading, and in the sports market, it cannot do so without a significant increase in staff and funding.

Such changes seem unlikely to occur anytime soon. This year, CFTC leadership has been working to permanently reduce the agency's size. Earlier this month, President Trump's nominee for the agency's leadership, Brian Quintenz, stalled his candidacy over the summer after a clash with crypto industry executives Tyler and Cameron Winklevoss. The two strongly opposed many of Quintenz's plans, including increasing the CFTC's budget.

The billionaire twin brothers (Tyler Winklevoss) believe that expanding the agency's regulatory power will lead to "regulatory capture" (PANews note: a form of political corruption).

Daniel Wallach, a gambling and sports betting law expert, said the CFTC's ability to regulate sports betting markets is insufficient compared to existing state-level sports betting regulations. State laws require stakeholders to proactively combat insider trading and cooperate with law enforcement and third-party integrity monitoring companies.

“In contrast, the CFTC has no sports-related regulations governing this type of activity,” he said. “These companies are essentially self-regulating not only their own event contracts but also their own integrity.”

The prediction business has boomed over the past year. Prediction markets allow users to place financial bets on nearly anything, from sports and politics to cryptocurrencies and cultural events. Last Monday, the industry's four largest prediction markets—Kalshi, Polymarket, Limitless, and Myriad—set a record $2 billion in weekly trading volume.

A frequently cited Certuity report estimates that the prediction market as an industry could be worth $95.5 billion by 2035, growing at a compound annual growth rate of 46.8%. Polymarket and Kalshi currently hold approximately 96% of the market share, with recent funding rounds valuing the companies at $9 billion and $5 billion, respectively.

Kalshi, currently the largest sports prediction market in the United States, has established systems to identify suspicious trading activity to meet the requirements of the CFTC. A spokesperson for the company stated that it has partnered with IC360, a trustworthiness monitoring company.

The spokesperson added: "Insider trading is a harmful activity and is expressly prohibited on Kalshi."

However, legal expert Daniel Wallach believes that with the US CFTC apparently making no attempt to adjust its regulatory approach to the sports market, companies like Kalshi are effectively being left on their own, changing the balance of power between platforms and regulators in stark contrast to the existing situation in traditional sports betting.

"These for-profit companies operate in a regulatory vacuum, setting their own policies with no constraints or limits on their ability to trade in this sector," he said. "Match-fixing and insider trading have existed since the dawn of sports, and there are no rules to hold these companies accountable."

Leading scholars studying prediction markets say that not only do these platforms fail to curb insider trading, but in principle, they are designed to support it. Robin Hanson, a professor at George Mason University and a recognized authority on prediction markets in the United States, said in an interview last October: "If the purpose of a prediction market is to obtain accurate information about prices, then you definitely want to allow insiders to trade, even if that discourages others from placing bets, but it makes prices more accurate."

While prediction markets may present new challenges for regulating misconduct in sports betting, some argue they also offer new opportunities to combat insider trading.

While Kalshi doesn’t use cryptocurrencies in its day-to-day operations, its main competitor, Polymarket, does — a reliance that supporters argue brings greater transparency.

Marcin Kazmierczak, co-founder of RedStone, an oracle network used by prediction markets to verify information and settle bets, said that because all transactions on platforms like Polymarket are publicly visible on the blockchain ledger, the setup makes it easier to identify suspicious trading activity.

“This transparency alone won’t eliminate insider trading, but it will enable detection at a scale and speed that traditional systems can’t match.”

Coinbase Chief Legal Officer Paul Grewal has suggested that on-chain prediction markets could do a better job than traditional gambling platforms at preventing crimes like last week’s NBA betting scandal.

Indeed, in recent months, observers have noticed multiple instances of suspiciously timed trades on Polymarket. Notably, earlier this month, users of the site appeared to have accurately predicted the Nobel Prize winners hours before they were announced, leading 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 statement condemning insider trading.

Instead, Polymarket's account X retweeted a news story about the situation, exploiting the potential scandal to promote its products.

"Latest news: It has been revealed that only five people within the Nobel Peace Prize Foundation knew the Nobel Peace Prize winner before it was announced, while everyone on 'Polymarket' knew it in advance."

Polymarket plans to relaunch in the United States soon after being forced to move overseas in 2022 for failing to comply with U.S. CFTC regulations.

While Kalshi and Polymarket differ slightly in their public stances on insider trading, they occupy similar positions in the current U.S. political ecosystem. Both firms count Donald Trump Jr., the president’s son, as an advisor.