Prediction markets have recently come under scrutiny, particularly concerning the controversial type known as "mention markets." These markets enable participants to bet on whether a notable public figure will use specific phrases during scheduled appearances.
In September, the Commodity Futures Trading Commission (CFTC) took action by prohibiting Gabriel Perez, a former teleprompter operator for President Donald Trump, from engaging in prediction markets for three years. The prohibition followed allegations that Perez had placed illegal bets based on insider knowledge of upcoming speeches by Trump, allowing him to make risk-free trades. The CFTC later highlighted the risks of manipulation inherent in mention markets.
On September 22, the CFTC issued a staff advisory outlining the vulnerabilities of these markets, specifically mentioning contracts reliant on the actions of individual persons. The advisory noted that such contracts may lack independent generation and external verification.
Prediction markets are classified as Designated Contract Markets under the CFTC's guidelines. This classification mandates compliance with 23 core principles, including a prohibition against contracts prone to manipulation. The CFTC expects that any DCMs wishing to offer mention markets will implement preventive trading rules to identify and deter potential manipulation.
Additionally, the advisory is not meant to create enforceable rights or regulations according to the CFTC, which also clarified that it does not provide any definitive no-action stance.
In related developments, New York Attorney General Letitia James has filed a lawsuit against Polymarket, marking a continuation of the state's crackdown on unlicensed gambling operations. This came shortly after James initiated legal action against Kalshi in July, raising questions about other operators’ standing. The lawsuit against Polymarket accuses the platform of running illegal gambling, with particular attention to its policy allowing users aged 18 to 20 to trade on event contracts—contravening New York law that mandates users be at least 21 to engage in sports betting. In a statement, Governor Kathy Hochul, facing reelection in November, asserted that Polymarket’s activities risked public safety in New York.
In an effort to address the lawsuit, Polymarket has sought to relocate the case to the U.S. District Court for the Central District of New York and has filed a countersuit against James and the New York State Gaming Commission. Chief Legal Officer Neal Kumar criticized the attorney general's approach, stating that Polymarket would defend its user base vigorously.
The state is seeking significant financial restitution from Polymarket, including treble damages and penalties for each instance of underage wagering. The total damages claimed against Polymarket amounts to at least $4.6 billion, a figure significantly below the $36 billion sought from Kalshi.
In another arena, Kalshi has faced allegations of "wash trading" linked to its crypto and perpetual futures offerings. These claims emerged from discussions on social media and a Wall Street Journal analysis showing that a large proportion of these trades were concentrated around identical order sizes. Kalshi has strongly denied the accusations in an extensive rebuttal, asserting its commitment to preventing wash trading through rigorous market-maker fees and self-trade blocking mechanisms. The CFTC has neither confirmed nor denied any investigation related to these allegations. Meanwhile, Kalshi has submitted a request to the CFTC to transition from full-collateral requirements to risk-based margin trading for specific contracts.
