Prediction Markets: Regulation, Risks & Rise of Kalshi and Polymarket

Prediction markets came under scrutiny in 2025 after political advisory and investment links involving Kalshi and Polymarket raised concerns over insider influence in event-based trading.

• Prediction markets have transitioned into a multi-billion dollar financial asset class in 2026, with total notional trading volume exceeding $44 billion in 2025.
• Kalshi and Polymarket both claim to be the largest prediction market platforms globally.

About Prediction Markets

• A prediction market is a platform where users buy units of a ‘probable event’ to make a profit when that event happens (or not).

• Funding Mechanism: Users can fund their trading accounts through:
  • crypto, credit/debit cards, or bank transfers. 
• Platform Charges: A platform fee may or may not be charged. 
• Digital Payment Mechanism: Polymarket conducts transactions using the USDC stablecoin (pegged to the US Dollar).
  • Transactions are executed via the Polygon blockchain network.
• Scope of Events: Users can browse and trade on events across domains such as:
  • Science
  • Sports
  • Culture
  • Finance
  • Politics and public affairs

Explore UPSC Online Courses

Explore UPSC Online Courses

Reasons for Rising Popularity of Prediction Markets

• Efficient Information Aggregation: Prediction markets aggregate dispersed information through price discovery, often producing accurate forecasts, as demonstrated by the Iowa Electronic Markets in U.S. elections.
• Real-Time Updating of Probabilities: Prediction market prices adjust immediately when new information becomes available.
• Declining Trust in Opinion Polls: Forecasting errors in traditional opinion polls have encouraged greater reliance on market-based probability estimates.
• Expansion Beyond Political Forecasting: Prediction markets have expanded into areas such as economic indicators, sports outcomes, and public health forecasting, thereby broadening participation and relevance.

Why Are Prediction Markets Being Criticised?

• Promotion of Irresponsible Gambling: Critics argue that prediction markets resemble speculative betting and may promote gambling behaviour under the guise of financial trading, particularly on platforms such as Kalshi and Polymarket.
• Betting on Violence and Sensitive Events: Opponents contend that allowing contracts on wars, assassinations, or disasters creates ethical concerns by incentivising people to profit from violence and instability
• Insider Trading Risks: Critics warn that powerful individuals with access to privileged information may influence or profit from event-based contracts in sensitive markets.
  • For example:  In January 2025, Kalshi announced that Donald Trump Jr. had joined as a strategic advisor, raising concerns about potential access to insider political information.
• Political Influence and Perception Manipulation: Critics argue that presenting users’ bets as “statistical truths” may shape public perception and potentially influence electoral narratives.
  • For Example:  Trump Jr. claimed on social media platform X that insiders used Kalshi to know election results hours before mainstream media projections, raising concerns about narrative shaping.

Are Prediction Markets Regulated?

• Prediction markets operate in a regulatory grey area globally, as they are permitted and regulated in some countries while banned or restricted in others.
  • For Example: Kalshi reported it was regulated by the U.S. Commodity Futures Trading Commission (CFTC), but it faces restrictions and legal challenges in multiple U.S. states.
    • Further, 33 countries are completely restricted from accessing Polymarket, including the U.S., Germany, UK, and Singapore.

Explore UPSC Optional Courses

Explore UPSC Optional Courses

Prediction Markets in India: A Regulatory Grey Area

• Prediction markets are not formally recognised under Indian securities law and are generally treated under the broader framework of betting and gambling, which is a State subject (Entry 34, State List, Seventh Schedule) of the Constitution.
• There is no explicit legislation in India that directly regulates “prediction markets” as a separate financial category.

Way Forward

• Clear Legal Classification: A clear distinction should be made between gambling and information-based event contracts by defining prediction markets within financial law frameworks.
  • For example, the regulated event-trading platform Kalshi operates under oversight of the Commodity Futures Trading Commission, providing a model for structured regulation instead of blanket bans.
• Stronger Information Controls: Regulations must prevent politically exposed persons or corporate insiders from exploiting privileged information in sensitive markets.
  • For Example: Public debate emerged when Donald Trump Jr. joined Kalshi as a strategic advisor, highlighting concerns about insider influence.
• International Coordination: Given cross-border digital access, global coordination is needed to regulate platforms that operate across jurisdictions, especially where access is restricted in multiple countries, as in the case of Polymarket.

Check Out UPSC CSE Books

Visit PW Store

Prediction Markets vs Betting Markets

DOWNLOAD PDF