Prediction Markets Insider Trading Already Illegal, Enforcement Gaps Remain

Why it Matters

The Congressional Research Service has a message for anyone who thought betting on a merger, election, or policy announcement using inside information was a legal gray area: it isn't. A report published April 1, 2026 on prediction markets insider trading lays out the existing legal framework — and where it falls short — as Congress weighs at least five separate bills targeting the practice. The report's central finding: existing law likely already covers insider trading on prediction markets, but the framework is complicated and the coverage is uneven.

The report arrives as federal prosecutors and regulators are already circling. The Commodity Futures Trading Commission and the Department of Justice are each examining whether trades on platforms like Kalshi and Polymarket violated federal law. These are platforms where users bet on real-world outcomes using event contracts regulated as commodity derivatives.

What to Know ABout Prediction Markets Law

Unlike stock markets, prediction markets fall under the Commodity Exchange Act (CEA) and CFTC jurisdiction — not the Securities and Exchange Commission. That matters because insider trading prohibitions in derivatives law have historically been narrower than those under SEC Rule 10b-5, which governs securities markets.

The CFTC's primary enforcement tool here is Rule 180.1, modeled after SEC Rule 10b-5. It allows the agency to pursue cases under the "misappropriation theory" — meaning someone who steals or misuses confidential information to trade may be liable. But the CFTC has previously acknowledged that derivatives markets have "long operated in a way that allows for market participants to trade on the basis of lawfully obtained" material nonpublic information (MNPI), and that simply failing to disclose MNPI before trading does not, by itself, constitute a violation.

That nuance is significant. It means the line between legal and illegal conduct in prediction markets law is not always clear — and that ambiguity has fed a perception, which regulators are now pushing back against, that the space is effectively unregulated.

The STOCK Act's Role — and Its Limits

For government officials, the picture is clearer. The Stop Trading on Congressional Knowledge (STOCK) Act amended the CEA to explicitly prohibit Members of Congress, federal employees, and judicial officers from using nonpublic information derived from their official positions to trade commodity futures, options, or swaps — a category that includes event contracts on prediction markets.

That prohibition covers a meaningful slice of potential bad actors. But the CRS report identifies a significant gap: private-sector employees.

A corporate employee who bets on a merger outcome they have advance knowledge of may be violating federal law under existing CFTC anti-fraud authority — but many corporate insider trading policies have not yet been updated to explicitly cover prediction market instruments. The report flags this as an area where regulatory clarity is lacking, and where new rulemaking or legislation may be warranted.

Prediction Markets Insider Trading Enforcement

Even before Congress acts, regulators are signaling they won't wait.

CFTC Director of Enforcement David Miller publicly declared in late March and early April 2026 that curbing insider trading in prediction markets is a top enforcement priority. He called it a "myth" that insider trading law doesn't apply to these platforms, and confirmed the Division will "aggressively detect, investigate, and, where appropriate, prosecute" violators under existing CEA authority and anti-fraud regulations.

Federal prosecutors were reported in March 2026 to be exploring whether prediction market bets could trigger criminal insider trading laws — a signal of cross-agency interest that goes beyond civil enforcement.

The backdrop: a series of large, well-timed trades on prediction market platforms in late 2025 and early 2026 on military actions among other items raised alarms that users were profiting on MNPI before major events were publicly announced. Those trades appear to have catalyzed both the regulatory response and the legislative push now underway.

California Governor Gavin Newsom also issued an executive order banning state government officials from using insider knowledge on prediction markets, reflecting pressure building at the state level as well.

What Congress Is Considering

The CRS report functions, in part, as a legislative briefing — cataloguing the bills now in play and the legal questions each would need to answer.

S. 4017 — End Prediction Market Corruption Act would categorically prohibit the use of MNPI to trade on prediction markets, taking a sweeping ban approach.

The Prediction Markets Security and Integrity Act of 2026 would similarly prohibit MNPI-based trading, with a more targeted regulatory framework.

The Public Integrity in Financial Prediction Markets Act of 2026 — introduced in both chambers by Rep. Richie Torres (D-NY) and Sen. Elissa Slotkin (D-MI) — focuses specifically on banning insider trading by government officials on prediction market platforms. It had more than 42 Democratic co-sponsors as of the report's publication.

The most notable for its bipartisan backing: the PREDICT Act (Preventing Real-time Exploitation and Deceptive Insider Congressional Trading Act), introduced March 25, 2026 by Reps. Adrian Smith (R-NE) and Nikki Budzinski (D-IL). Its cross-aisle sponsorship may give it the clearest path forward among the current proposals.

The Administration's Complicated Position

The enforcement push creates a tension with the current administration's broader posture. CFTC Chairman Selig has stated that "the era of regulation by enforcement is over" and that the agency will "focus on core policing of fraud, abuse, and manipulation rather than setting policy." That framing positions the current insider trading crackdown as enforcement of existing rules — not a regulatory expansion — which is consistent with the administration's deregulatory signals.

The CFTC also signaled in February 2026 that formal rulemaking on prediction markets, including on insider trading standards, is forthcoming. That suggests the administration may ultimately pursue a rule-based framework — giving the industry clearer standards — rather than relying solely on enforcement actions under existing authority.

The Bottom Line

The CRS report's bottom line is that securities law, prediction markets, and commodity derivatives law are now converging in ways Congress has not fully addressed. Existing tools — the CEA, CFTC Rule 180.1, and the STOCK Act — provide a legal foundation, but leave meaningful gaps, particularly for private actors and for market manipulation scenarios that don't fit neatly into the misappropriation framework.

With active DOJ and CFTC investigations, five bills in various stages of development, and imminent rulemaking on the horizon, the window for Congress to set the terms of this debate — rather than react to enforcement actions — is narrowing. Just last week, thre states tried to enact legislative bans. The Trump Administration filed lawsuits against them, arguing that the controversial prediction market industry should be solely regulated by the federal government, not by state gambling commissions.

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