Behind the Sports Betting Scandal: Is the Prediction Market Complicit?

By Sander Lutz and Guillermo Jimenez

Source: Decrypt

Original title: Betting Scandals Are Rocking Sports. Will Prediction Markets Help or Hurt?

Compiled and compiled by: BitpushNews

The American professional sports world was hit by the worst betting scandal in recent years last week.

The incident comes as U.S. professional leagues and gambling companies are embracing the booming prediction market industry, raising questions about whether their combination will soon lead to predictable consequences.

On Thursday, an FBI operation resulted in the arrest of an NBA player and a coach suspected of involvement in multiple betting schemes, including manipulating game results to influence sports betting.

Just a day earlier, the NHL signed a licensing agreement with a prediction market, becoming the first major North American sports league to do so. Prediction markets are emerging and wildly popular betting websites that are sweeping through traditional sports betting while operating in a legal gray area.

On the same day, DraftKings, one of the most popular sports betting websites in the United States, acquired its own prediction market company, making a major foray into this emerging field.

As federal law enforcement focuses its attention on insider trading in sports betting, some experts are increasingly concerned about the shift of sports betting toward prediction markets—while others argue that such betting platforms, if they utilize public blockchain networks, would provide an additional layer of transparency.

Former government regulators and legal experts told Decrypt that the transition to prediction markets could make the already daunting task of monitoring sports betting even more difficult and lead to a surge in sports-related betting misconduct.

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

Today, the agency is not only preparing to regulate the expanding sports prediction market, but also much of the cryptocurrency sector, largely thanks to the proactive push from the Donald Trump administration.

A former CFTC official, who requested anonymity to speak candidly, said the agency — which is not only much smaller than other financial regulators but has also suffered major layoffs this year — is not equipped to regulate cryptocurrencies or sports betting, let alone both industries at once.

"I think the CFTC is going to be overwhelmed," the former official told Decrypt. "You'll see more and more of these insider trading cases happening in prediction markets because the CFTC isn't monitoring them—they don't have enough manpower to uncover these problems themselves."

Due to its size and historical mission, the regulator relies primarily on whistleblowers and self-reporting from market participants to eliminate corruption in the markets it regulates. The former CFTC official stated that it does not proactively search for insider trading and that such surveillance in the sports market is impossible without a significant increase in personnel and funding.

Such a change seems unlikely to happen at the agency anytime soon.

This year, the CFTC leadership has been pushing for a permanent downsizing of the agency. Earlier this year, President Trump nominated Brian Quintents to head the agency, but his candidacy was thwarted this summer by clashes with the Taylor and Cameron Winklevoss brothers—both cryptocurrency executives who strongly opposed Quintents' plans to increase the CFTC's budget and other issues.

The billionaire twins argue that increasing the agency's power would lead to "regulatory capture."

Gambling and sports betting law expert Daniel Wallach told Decrypt that the CFTC's ability to monitor the sports market is insufficient compared to existing state-level sports betting regulations. He said state laws require stakeholders to proactively prevent insider trading and cooperate with law enforcement and third-party integrity monitoring companies.

"In contrast, under the CFTC, there are no sports-related regulations that deal with this kind of activity," Wallach said, referring to prediction markets. "These companies are essentially not only required to self-certify their event contracts, but also to self-regulate their integrity."

The CFTC did not respond to Decrypt's request for comment on this article. The agency's automated response cited staff reductions due to the ongoing government shutdown.

The prediction business has boomed over the past year. Prediction markets allow users to take financial positions on nearly everything from sports and politics to cryptocurrencies and cultural events. Last Monday, the industry hit a record weekly trading volume of $2 billion across four major prediction markets: Kalshi , Polymarket , Limitless , and Myriad .

A relatively authoritative Certuity report estimates that the forecasting market as an industry could reach a valuation of $95.5 billion by 2035, with a compound annual growth rate of 46.8%.

Polymarket and Kalshi currently control approximately 96% of the market share and are valued at $9 billion and $5 billion, respectively, according to recent funding rounds.

A spokesperson for Kalshi, currently the largest prediction marketplace offering sports contracts in the US, told Decrypt that the company has established an internal system to identify suspicious trading activity, as required by the CFTC. The company stated that it has also partnered with IC360, an integrity monitoring company.

"Insider trading is harmful and is explicitly prohibited in Kalshi," the spokesperson added.

However, Wallach maintains that in a political environment where the CFTC has clearly not attempted to adjust its practices to monitor the sports market, companies like Kalshi are essentially left to their own devices, which alters the power dynamics between platforms and regulators in a way that differs from the current situation in traditional sports betting.

"These are for-profit businesses that operate in a regulatory vacuum and set their own policies without any checks or limitations on their ability to do so," Wallach said.

"Match-fixing and insider information have plagued sports throughout history," the lawyer continued, "and currently there are no rules that hold these companies accountable."

Leading academics studying prediction markets say that not only do these platforms not prevent insider trading, but they are, in principle, designed to support it. "If the purpose of [prediction] markets is to get accurate price information, then you definitely want to allow insiders to trade, even if that prevents other people from betting, because that makes the price more accurate," Robin Hanson, a professor at George Mason University and widely considered the leading expert on prediction markets in the United States, told Decrypt last October.

While prediction markets may present new challenges to regulating misconduct in sports betting, some argue that 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, told Decrypt that because all transactions on platforms like Polymarket are publicly visible on the blockchain ledger, this setup makes suspicious trading activity easier to identify.

"This transparency alone cannot prevent insider trading, but it enables detection on a scale and at a speed that traditional systems cannot match," Kazmierczak said.

Coinbase's chief legal officer, Paul Grewal, suggested on Thursday that on-chain prediction markets will do more than traditional betting platforms in 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 correctly selected the Nobel Peace Prize winner hours before the winner was publicly announced, leading Norwegian officials to launch an internal investigation into the matter.

However, Polymarket did not announce its own investigation into the Nobel Peace Prize market following the revelations, nor did the company issue any statement condemning insider trading.

Instead, Polymarket’s account number X retweeted a news alert about the situation and shortly thereafter capitalized on the potential scandal to promote its products.

"Breaking news: It has been revealed that only five people within the Nobel Peace Prize Foundation knew the results before the winners were announced," the company boasted in a post on X. "Everyone who checks Polymarket knows this."

Polymarkets is planning to relaunch in the U.S. soon after being kicked out of the country in 2022 for failing to comply with CFTC rules. The company did not respond to Decrypt’s repeated requests for comment on its stance on insider trading.

However, while Kalshi and Polymarket differ in their public stance on insider trading, their positions within the current U.S. political ecosystem are similar. Both firms are advised by the president's son, Donald Trump Jr.