The regulatory dilemma of prediction markets: event contracts, compliance obstacles, and market integrity risks
The global regulatory pressure faced by prediction markets in 2026 is essentially a conflict about "classification." Due to their unique design, prediction markets possess a triple identity as event derivatives, compliance obstacles, and financial trading venues, leading to intense collisions of different regulatory frameworks at their boundaries.The Regulatory Dilemma of Prediction Markets: Event Contracts, Compliance Obstacles, and Market Integrity Risks
In April 2026, the regulatory controversy surrounding prediction markets spread from the United States to the world. New York State sued Coinbase and Gemini, claiming their prediction market operations constituted unlicensed outcome-based trading activities, with a particular focus on the participation of users under 21. A few days later, the CFTC counter-sued New York State, asserting that event contracts fall under federal derivatives regulation, and that state governments lack the authority to block them with local laws. Almost simultaneously, Brazil blocked several prediction market platforms and tightened rules on derivatives related to sports, politics, and entertainment, retaining only contracts related to economic indicators such as interest rates and exchange rates.
These events point to the same question: How should prediction markets be defined?
If they are event derivatives, the regulatory focus is on clearing, settlement, and market transparency; if they touch on local licensing and user protection rules, the focus is on entry barriers, taxation, age restrictions, and addiction protection; if they are trading venues, the focus is on insider information and conflict of interest management. The regulatory dilemma of prediction markets is essentially a classification conflict.
From the perspective of contract structure, it falls under the derivatives framework. The CFTC defines "event contracts" as derivative instruments settled based on specific outcomes (such as macro data, financial reports, weather, or hurricane losses). Prices fluctuate with probabilities. When the trading objects are CPI, interest rates, or corporate financial reports, it has risk management functions. From this perspective, regulators are more concerned with contract design, clearing mechanisms, market monitoring, and preventing price manipulation.
From the perspective of user behavior, it faces compliance obstacles. The markets that attract the most attention often focus on elections, sports, geopolitics, and celebrity news. For many users, their motivation is to participate in short-term outcome trading rather than to hedge financial positions. This experience closely resembles traditional high-sensitivity event trading, triggering state government intervention. In the logic of New York State's lawsuit, prediction markets are viewed as outcome-based trading activities that circumvent local licensing, age restrictions, and tax rules.
As a trading venue, it faces risks associated with financial trading venues. When the market involves real funds and public interest events, it must introduce standard financial risk controls. Recently, a U.S. soldier was accused of profiting over $400,000 on Polymarket using military secrets, prompting a civil lawsuit from the CFTC. Kalshi also penalized three congressional candidates who expressed funding based on their own election results. These cases indicate that the market must establish conflict of interest management, abnormal trading monitoring, and participant exclusion systems.
The current regulatory conflict is essentially a struggle over the priority of three definitions. The recent ruling in the Kalshi v. New Jersey case reinforced the argument for federal priority, suggesting that the Commodity Exchange Act (CEA) may supersede state local laws. However, this is at the preliminary injunction stage and does not resolve the legality of all event categories in one go. The CFTC still maintains Rule 40.11, which prohibits registered entities from listing or clearing event contracts involving terrorism, assassination, war, entertainment trading, illegal activities, or events deemed contrary to public interest by the CFTC.
The global direction is similar, but the legal paths differ. Countries use different tools, but the direction is consistent: regulators will not solely accept the narrative of "information markets." Brazil allows derivatives linked to exchange rates and interest rates but strictly prohibits sports and political products; Argentine courts have demanded the blocking of platforms and the removal of applications on the grounds of lacking local licenses; the UK maintains a bifurcation: trades that meet legal definitions are regulated by local licenses, while products like Spread Betting fall under FCA regulation.
The final discretion of regulators mainly depends on three dimensions:
Trading Objects: Economic and corporate events are more easily categorized as financial instruments; sports, war, criminal cases, and celebrity private lives are more likely to trigger public risk, user protection, and moral hazard reviews.
User Behavior: Are users hedging risks, participating in price discovery, or engaging in short-term outcome trading?
Market Risks: Is there effective management of insider information, participation of minors, money laundering, and conflicts of interest?
The future of the industry is likely to diverge into several paths. Compliant event exchanges will focus on macro data, corporate events, and weather. Licensed event platforms will accept local licensing, taxation, age restrictions, and user protection rules. On-chain open markets will continue to cater to high-risk demands but will face regional blocking and KYC pressures. AI Oracles and signal markets may become independent tiers, shifting focus from short-term user trading to machine predictions, long-term prediction records, verifiable settlements, and institutional-level probability signals.
The real opportunity for prediction markets is not to turn all events into tradable outcomes but to ensure that judgments are recorded, verified, priced, and reused in subsequent decision-making. The winning hand in the next phase of the industry will depend on the refined definitions of event categories, participant qualifications, settlement standards, and trading risk controls; mere market expansion is no longer a barrier.
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