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Emerging Litigation Podcast
Prediction Markets: Predicting the Legal and Policy Possibilities
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Hello and welcome to the Emerging Litigation Podcast. I'm your host, Tom Hagee. Like it or not, today we're going to talk about prediction markets. These are platforms that allow users to trade contracts tied to real world outcomes. They are suddenly everywhere. Once confined to academic experiments and small political betting sites, they now handle billions of dollars in trading volume and cover everything from elections to interest rates to wars, pandemics, and corporate bankruptcies. This rapid expansion has drawn intense scrutiny from regulators, lawmakers, and courts, not because prediction markets are entirely new, but because they now operate at a scale and in some and in subject areas that strain existing legal frameworks. Just as an aside, I seem to recall in the office. Not in the office, the show, the office where I worked. And these were a lot of editors and reporters, so they were somewhat curmudgeonly and dark by nature. They used to have a death pool so they would place bets on when prominent celebrities would die. That's dark. I know. Well, I won't say who, but there were certain ones that I was like, wow, you're really. That person's young. You're really going to make money on that. Yeah, it was dark. I didn't participate because, you know, I'm a better person. So at the center of the controversy is a deceptively simple question. What exactly are prediction markets? Some of you already know you can skip ahead, but are they financial instruments governed by federal commodities law? Are they gambling products regulated by the states? Are they something new that falls awkwardly between those regimes? Understanding why prediction markets has become such a flashpoint, and this requires a brief explanation of how they work and why they make regulators queasy. So what are they? Why do they matter? Prediction markets allow users to buy and sell contracts whose value depends on whether a specific event occurs. A contract might pay out $1 if a particular outcome happens. For example, if interest rates rise by a certain date and nothing if it does not. The price of the contract. I mean, you all know how gambling works. The price of the contract reflects the market's collective assessment of the probability of that outcome. Supporters argue that these markets aggregate information more efficiently than polls, forecasts, or expert panels. Prices move as traders incorporate new data, insider knowledge, or changing conditions. For economists and policymakers, that information can be valuable. Unlike traditional futures markets tied to commodities like oil or wheat, prediction markets often hinge on human behavior, political decisions, or catastrophic events. God help you. That distinction is what pulls them into legal and ethical gray zones. And that's where we'd like to play here on the Emerging Litigation podcast. In the legal and ethical gray zones. So when things get weird or go wrong. As prediction markets expanded beyond academic settings, Some offerings began to test the outer limits of what regulators were prepared to tolerate. In several instances over the past decade, platforms or users proposed contracts tied to outcomes that made observers visibly uncomfortable. Whether a political leader would die in office, Whether a terrorist attack would occur in a specific city, or whether a war would escalate by a certain date. Even when such contracts were short lived or never formally approved, they exposed a core tension. Markets that profit from human suffering or violence raised fundamental, fundamentally different concerns than markets predicting crop yields or inflation rates. That tension became concrete in April 2026, when users on a major prediction market platform were briefly allowed to wager on the fate of US fighter pilots after an F15 jet was shot down over Iran while an active search and rescue operation was still underway. Yeah, that's disgusting. One crew member had had been rescued and the other was still missing. Fortunately, a crew member crew member has been recovered and unfortunately is seriously injured. Anyway, the market allowed bets on when the United States would confirm that the pilots had been recovered. After public backlash. As you know something, sometimes you need some backlash. The platform removed the market and issued an apology.
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There you go.
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It can be done. Stating that it did not meet internal integrity standards. So they do have them and should not have been posted. Members of Congress Congress cited the episode is emblematic of what they describe as death markets, Arguing that certain event contracts cross a line from forecasting into moral hazard. Other problems were more operational than philosophical. Thinly traded contracts proved susceptible to manipulation. Users with access to non public information or with the ability to influence outcomes raised alarms about insider training. Trading. You think? And sudden price swings based on rumors highlighted how easily prediction markets could amplify. Amplify Misinformation. These episodes did not remain theoretical. They became exhibits and regulatory debates, Enforcement actions and court filings shaping how agencies and lawmakers now approach the industry. So what are scholars and regulators saying? Analysts at the Congressional Research Research Service Analysts at the Congressional Research Service have warned that traditional anti fraud and insider trading principles apply fully to prediction markets, even though the contracts are novel in form. State focused policy organizations have described prediction markets as one of the most contentious unsolved questions in modern gambling and financial regulation. Citing conflicts with state police powers and tribal gaming compacts, Legal commentators have emphasized that the Commodity Exchange Act's public interest limitation, particularly for contracts involving war, terrorism or assassination, is likely to be tested aggressively as courts confront these cases. And let's hope they do now. Is there a federal state collision? And who regulates these markets? Prediction market operators such as Kalshi and Polymarket argue that their products are eventually contracts regulated exclusively by the Commodity Futures Trading Commission under the Commodity Exchange Act. State regulators disagree, particularly where contracts resemble sports betting or election wagering. That conflict has escalated into direct litigation. In early April 2026, the federal government, acting through the CFTC and the DOJ, sued Illinois, Arizona and Connecticut to block those states from enforcing gambling laws against CFTC registered prediction markets. Federal officials argue that state regulation would create a fragmented patchwork, God forbid, and undermine Congress's grant of exclusive authority to the cftc. States counter that these platforms are offering unlicensed gambling products under long standing state law and that federal commodities regulation was never intended to nationalize sports betting or or election wagering. Several federal court Several federal courts have already reached conflicting conclusions, increasing the likelihood of appellate review and eventually Supreme Court intervention. Now, while the courts sort out jurisdictional questions, Congress has begun to act. I'm sorry, I don't know why I laughed at that. Congress is acting in March 2026, not too long ago, a bipartisan group of US senators introduced legislation that would bar CFTC regulated prediction markets from offering sports based or casino style contracts. Supporters described the bill as necessary to protect state consumer protections and tribal gaming compacts. Critics view it as a targeted effort to shield incumbent gambling interests. The mere introduction of federal legislation matters. Courts often look to congressional activity as a signal that existing law may be incomplete or ill suited to new market structures, a factor that could influence how judges evaluate claims of federal preemption. Another pressure point is insider training. Geez, I keep saying training. Insider training I think is probably something we need more of. Another pressure point is Insider Trading. In February 2026, also not that long ago, the CFTC's Division of Enforcement issued a public advisory describing enforcement actions involving misuse of non public information on prediction markets, including trades placed by individuals with direct influence over contract outcomes. Can you imagine the agency made claim clear that traditional commodities law prohibitions on fraud, manipulation and insider trading apply fully to event contracts? You would think so. That position undercuts a popular narrative, particularly on social media, because that's what we need to be paying attention to, that prediction markets are a regulatory free zone. We do so well with free zones. According to public statements by CFTC enforcement leadership, insider training and prediction markets is a priority enforcement area going forward. Now, what about civil liability? Who gets sued? Regulatory enforcement is only part of the risk landscape as prediction markets expand into sensitive subject matter. Civil litigation Exposure is becoming harder to ignore, particularly where real world harm, deception or misuse of information is alleged. Who would do that? While few large civil cases have yet to reach judgment, litigators are already identifying several liability theories that could be tested as these markets mature. Platform liability would be one. Plaintiffs may argue that a platform failed to exercise reasonable care in approving or monitoring certain event contracts, particularly where those contracts involve violence, violence, death, or ongoing emergencies. Claims could include negligence, failure to implement adequate safeguards, or aiding and abetting unlawful conduct. If a platform is alleged to have knowingly facilitated manipulation or misuse of information, I'm going to say that again. Claims could include negligence, fail, failure to Claims could include negligence, failure to implement adequate standards, or aiding and abetting unlawful conduct. If a platform is alleged to have knowingly facilitated manipulation or misuse of information, who would ever misuse information? What about insider trading adjacent claims? Even outside formal CFTC enforcement, civil plaintiffs may pursue fraud based theories against traders who allegedly used non public information or against platforms that failed to detect or deter such conduct. In this context, traditional misrepresentation, unjust enrichment, or civil conspiracy claims could arise alongside regulatory action, wrongful death, and personal injury theories. In the most controversial scenarios, including so called death markets, which is something my editors used to participate in. Apparently, plaintiffs could attempt to argue that financial incentives tied to violent outcomes created foreseeable risks, while such claims would face substantial doctrinal hurdles. While such claims would face substantial doctrinal hurdle, While such claims would face substantial doctrinal hurdles, their mere filing could impose significant reputational and litigation costs. What about consumer protection and state law claims? If federal preemption arguments fail or are narrowed, plaintiffs may face state law consumer protection actions alleging deceptive practices, unfair competition, or unlawful gambling activity. These claims are particularly attractive to state attorneys general and private plaintiffs operating under fee shifting statutes. Taken together, these theories underscore a central point that even if prediction markets ultimately prevail on federal regulatory questions, civil litigation may become the primary mechanism through which boundaries are tested and enforced. What about public interest limits and yes, death markets? Beyond gambling and fraud, prediction markets raise questions about what kinds of contracts should be allowed at all. The Commodity Exchange act permits the CFTC to block contracts deemed contrary to the public interest, including those tied to war, terrorism, or assassination. Recent controversy over markets linked to military conflict and political violence has intensified scrutiny. Industry rivals have publicly criticized so called death markets, while lawmakers have questioned whether existing safeguards are sufficient to prevent harmful incentives or exploitation of sensitive information. How about a few disturbing real, real world examples that regulators are grappling with. So to understand why these regulators might be uneasy or queasy, it helps to look at the kinds of contracts that have appeared or have been proposed in recent years. One would be assassination and leadership desk contracts. Markets have circulated asking whether a specific political leader would die or be removed from office within a defined time period, raising immediate concerns about moral hazard and the potential to incentivize violence. Can you imagine, you bet that somebody's gonna expire or be assassinated, then you go out and participate in that. Yeah, that would be. I'm gonna go out on a limb. I'm gonna say that's wrong. War escalation bets. Some platforms have offered contracts tied to the outbreak of armed conflict, missile strikes, or expansion of ongoing wars, effectively allowing traders to profit from geopolitical catastrophe. What do people not have jobs is my question. What about terrorism? Terror. Terrorism. What about terrorism related outcomes? Contracts tied to the currents occurrence of terrorist attacks in specific cities or regions have drawn sharp criticism, as they should from lawmakers and former regulators who argue that such markets cross a clear public interest line. I'm going to go along with that one. I endorse that. You know, the criticism, not the thing. Public health catastrophe markets. What about that? During and after the COVID 19 pandemic, you all remember that proposals surfaced for contracts tied to death toll thresholds. Jesus. Or emergency declarations, prompting debate over whether such markets exploit collective trau. I think again, I'm going to go out on a limb. I'm going to say the answer is yes, they do exploit collective trauma. Regulators have signaled that even if prediction markets are lawful in general, these categories may be uniquely vulnerable to prohibition under existing public interest authority. They may be lawful, but they're awful. I think somebody must have said that. Somebody with a bad sense of humor. So what are we going to watch next? What are we looking for? Several developments will shape the future prediction markets. Federal appellate courts are going to rule on whether CFTC regulation preempts state gambling laws. Will there be congressional action on anything or or on this to narrow or redefine permissible permissible event contracts? Speech impediment, expanding expanded enforcement. Will there be that targeting insider trading, manipulation and market abuse? What about rulemaking by the CFTC clarifying which categories of contracts are off limits? Prediction markets promise valuable information aggregation, but they also expose gaps between financial regulation, gambling law and public interest safeguards. For litigators, regulators and market participants alike, the next year is likely to produce defining precedents.
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The emerging litigation podcast is a production of critical legal content which owns the
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awesome brand HB Litigation.
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Critical Legal Content is a company I founded in 2012. What we do is simple. We create content that's critical on legal
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topics for law firms and legal service providers.
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That kind of content can be blogs, papers, they can be podcasts, webinars, and we have a good time doing it. And as for HP Litigation, well, that's the name under which we publish interesting
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legal news items, webinars, articles, guest articles,
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all on emerging litigation topics. That's what we do. Once again, I'm Tom Hagee with Critical Legal Content and HP Litigation.
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If you like what you hear and
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want to participate, give me a shout. My contact information is in the show Notes.
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Thanks for listening.