Insider Trading and Prediction Markets: What the Law Actually Says
With prediction market platforms like Polymarket and Kalshi recording over $60 billion in trading volume in 2025, a 400% increase year over year, federal regulators are no longer watching from the sidelines. The CFTC has signalled imminent rulemaking. The U.S. Attorney for the Southern District of New York has said his office expects enforcement actions. And Congress has introduced new legislation following high-profile incidents of suspected insider trading, including a $30,000 bet placed on Polymarket moments before the Trump administration’s seizure of Venezuelan President Nicolás Maduro that netted over $400,000.
If you are a prediction market participant, a platform operator, or a Web3 founder watching wallets pop up out of nowhere ahead of major events, you are right to be asking: Is this illegal? The honest answer is: it depends, but probably more often than people think.
This article breaks down the legal framework for insider trading, explains how it already applies to prediction markets, and identifies where the law gets complicated fast.
Insider Trading Is a Form of Fraud, Not a Separate Law
There is no standalone federal statute that comprehensively defines “insider trading.” Instead, insider trading liability arises primarily from the anti-fraud provisions of the securities laws, most notably Section 10(b) of the Securities Exchange Act and Rule 10b-5, as interpreted by courts.
All fraud involves some form of deception for gain. In the context of insider trading, that deception typically arises from violating an implied or explicit promise about how confidential information may be used. The most familiar example is a corporate employee who trades on material non-public information (MNPI) about their employer’s stock. Whether or not they signed an explicit agreement, employees have an implied legal duty to act in the best interests of the company and its shareholders. Trading on inside knowledge betrays that duty — and that betrayal is what makes it fraud.
This framing matters because it shows that the legal risk in prediction markets is not an exotic new problem. It is the same anti-fraud framework applied to a new market structure.
For a broader look at how U.S. fraud law applies to crypto and digital assets, see our analysis of the FTX collapse and regulatory enforcement.
The Core Principle: The Promise Is What Creates Liability
Lawyers who work in this area talk about “duties,” “classical theory,” “misappropriation theory,” “tippers,” and “tippees.” All of that language points to the same underlying concept: whether the person who traded on inside information had made a promise, express or implied, not to use it that way.
Classic scenario
An employee learns that her company is about to announce better-than-expected earnings. She buys shares before the announcement. This is textbook insider trading because she has breached her implicit promise to shareholders not to exploit confidential company information.
Less obvious scenario
That same employee instead buys shares in her company’s biggest competitor, betting the competitor will benefit from market sentiment after the announcement. She never made any promise to the competitor’s shareholders, but she arguably still committed insider trading by violating her confidentiality obligations to her own employer. This specific scenario was the basis for SEC v. Panuwat, a case that remains actively debated and is highly relevant to anyone trading adjacent markets on inside information.
No liability scenario
Someone overhears two investment bankers at a nearby table loudly discussing a pending merger. They leave the restaurant and trade on that information. Even though the information is clearly MNPI, there is generally no insider trading here because the eavesdropper made no promise to anyone. Absent deception in obtaining the information or a breached duty, the eavesdropper has not engaged in insider trading. The bankers may have violated their own obligations through carelessness, but absent a breach of duty by the trader, there is no fraud.
In traditional insider trading doctrine, liability generally requires a deceptive misuse of information in breach of a fiduciary duty or relationship of trust and confidence. In the absence of such a breach, insider trading liability is far less likely to attach.
This Framework Applies to Commodities, Not Just Securities
One misconception worth correcting early: Insider trading law is not limited to stocks. Analogous concerns arise in commodities markets, including futures and derivatives, under the Commodity Exchange Act (CEA) and CFTC Regulation 180.1.
Consider a derivatives trader at a large agricultural firm who learns the company is about to make a major wheat purchase. If that trader buys wheat futures in their personal account before the firm executes its order, they have likely engaged in insider trading — not because they owed a duty to other futures traders, but because they violated their confidentiality obligations to their employer. However, if that same trader executes those wheat futures on behalf of the firm within their authorized role, there is no violation. Trading on internal information is precisely what they were hired to do.
This distinction between authorized and unauthorized use of inside information is central to understanding liability in prediction markets. Section 6(c)(1) of the Commodity Exchange Act and CFTC Regulation 180.1 provide the CFTC with broad anti-fraud authority modeled on Rule 10b-5. While insider trading jurisprudence in commodities markets is less developed than in securities law, courts have required deceptive conduct — typically involving a breach of duty or misappropriation of confidential information — in connection with a commodity transaction. Our article onthe CFTC’s Ooki DAO enforcement action covers how the CFTC exercises its anti-fraud authority in practice.
Prediction Markets: Same Law, New Terrain
So how does all of this apply to prediction markets? The straightforward answer is that nothing about the law changes. The label “prediction market” does not alter the underlying anti-fraud analysis. The question remains whether a trader has broken a promise in a deceptive trade.
Example 1: Likely insider trading
A Tesla employee with access to Q4 financial results uses that information to trade on a contract asking “Will TSLA beat Q4 estimates?” on a prediction market platform. This is almost certainly insider trading; the employee has either breached a fiduciary duty to Tesla shareholders or violated explicit confidentiality obligations. Courts have confirmed that trading in derivatives and binary options tied to a company’s performance does not sidestep insider trading liability simply because the instruments differ from the underlying stock.
Example 2: Likely permissible
That same Tesla employee trades on a contract asking “Will EV charging demand outpace gasoline demand over the next two years?” using publicly available adoption data and general industry expertise. As long as they are not drawing on Tesla’s internal plans or MNPI, no confidential promise has been broken, and no insider trading has occurred.
Example 3: Genuinely unclear. A government official with knowledge of an impending military operation places a bet on a Polymarket contract tied to the outcome. Did they violate a duty? Possibly, through obligations inherent in their government role. But the precise legal theory is unsettled, which is why Rep. Ritchie Torres introduced the Public Integrity in Financial Prediction Markets Act of 2026, specifically targeting government employees. Whether it passes and whether the broader corporate insider trading doctrine will be formally extended to event contracts remain open questions. Multiple legal theories could apply, including misappropriation, wire fraud, or breach of government confidentiality obligations. While prediction-market-specific doctrine is still evolving, existing fraud statutes provide prosecutors with substantial flexibility.
Example 4: No relevant duty. A prom attendee learns from her friend that the frontrunner for Prom King cannot attend the dance, and trades on a novelty prediction market contract. Is there insider trading? Technically, the question is still whether any duty was breached, but any such duty would have to be inferred entirely from social context rather than employment, contract, or law. These edge cases illustrate how quickly prediction market scenarios can strain the existing legal framework.
The Expanding Risk Surface
Traditional securities markets tie insider trading liability to companies because companies are typically the source of the confidentiality promises that create legal exposure. Commodities markets extend this slightly further, but still anchor liability in organizational relationships.
Prediction markets are different. By making almost any real-world event tradable, they pull potential MNPI from virtually every sphere of human activity, including corporate boardrooms, government agencies, entertainment, sports, and beyond. The further the underlying event is from any formal organizational relationship, the harder it becomes to identify the relevant duty—and to prosecute.
That said, participants should not confuse “hard to prosecute” with “safe.” As the SDNY has made clear, if the government believes fraud has occurred, it has tools beyond insider trading law, including criminal wire fraud. The United States v. Chastain prosecution of an OpenSea employee illustrates this: the DOJ charged an OpenSea employee with wire fraud to avoid litigating the NFT security status, and won. The prediction market label does not insulate anyone from prosecution if the underlying conduct appears to be fraud.
For platforms operating in this space, the compliance obligations are real and growing. CFTC-registered designated contract markets must maintain and enforce rules prohibiting abusive trading practices, including policies, surveillance systems, restricted trading lists, and employee training that explicitly cover event contract trading. For a sense of how aggressively the CFTC has moved against unregistered platforms, see our coverage of the CFTC’s action against Ooki DAO.
What Participants and Platforms Should Do Now
The enforcement landscape is moving faster than the law is being written. CFTC Chairman Selig has directed staff to begin drafting new event contract rules. The SDNY is actively evaluating fraud cases. Congressional legislation is in motion.
For traders, the practical guidance is straightforward: if you have access to information through a professional role or organizational relationship that is not publicly available, and you are considering using it to trade on a prediction market contract tied to that information, you are in legal risk territory, regardless of the specific instrument.
For platforms and operators, now is the time to implement and document internal compliance frameworks. CFTC core principles require it, and proactive compliance is the strongest defense if regulators come knocking.
Hodder Law works with crypto companies, Web3 platforms, and digital asset participants to navigate these regulatory questions. If you have questions about prediction market compliance, CFTC obligations, or potential insider trading exposure in digital asset markets, contact our team.
Key Legal References
Section 10(b) and Rule 10b-5 of the Securities Exchange Act: The principal federal securities anti-fraud provisions. Apply where the prediction market underlying event is tied to a public company.
Section 6(c)(1) of the Commodity Exchange Act and CFTC Regulation 180.1: The CFTC’s anti-fraud authority in commodities and derivatives markets, including event contracts traded on registered designated contract markets.
SEC v. Panuwat (N.D. Cal.): Established that trading in a company adjacent to your employer using MNPI from your employer may still constitute insider trading. Directly relevant to prediction market participants with corporate access to MNPI.
United States v. Chastain: DOJ used wire fraud to prosecute insider trading in NFT markets, signalling the government’s willingness to use alternative theories where insider trading doctrine is uncertain. The prediction market context is analogous.
18 U.S.C. § 1343 (Wire Fraud): A powerful and flexible fallback for prosecutors in any market structure where fraud can be shown, regardless of whether the instrument is a security or commodity.
Public Integrity in Financial Prediction Markets Act of 2026 (H.R. 7004): Proposed legislation targeting federal government employees trading on inside information in prediction markets, introduced following the Polymarket/Maduro incident.
CLARITY Act: The broader digital asset market structure legislation advancing through Congress. Our breakdown of the CLARITY Act covers how it may reshape CFTC and SEC jurisdiction over digital asset markets, including event contracts.
This article is for general informational purposes only and does not constitute legal advice or create an attorney-client relationship. Laws and regulatory guidance in this area are evolving rapidly. Consult a qualified attorney for advice specific to your circumstances.
For guidance specific to your situation, contact Hodder Law.
