The US Regulatory Framework
The CFTC (Commodity Futures Trading Commission) is the primary US regulator for prediction markets. Kalshi operates as a CFTC-regulated designated contract market (DCM), which means it is subject to full regulatory oversight including capital requirements, reporting obligations, and market surveillance. This regulated status gives Kalshi legal clarity but also imposes constraints on what it can list. The CFTC has blocked certain contract types, including some election-related contracts, on the grounds that they involve gaming rather than genuine economic hedging.
PredictIt operates under a CFTC no-action letter that was originally granted for academic research purposes. The terms of this letter have been contested, and PredictIt's regulatory future has been uncertain, with position limits and contract restrictions constraining its growth.
Blockchain-Based Platforms
Polymarket operates outside the US regulatory perimeter, using blockchain-based settlement on Polygon. This gives it flexibility in what markets it can list (including political and geopolitical events that US exchanges cannot offer) but creates legal uncertainty for US-based users. Polymarket has stated it does not serve US users, though enforcement of geographic restrictions on decentralized platforms is inherently limited.
Manifold operates play-money markets, which places it outside financial regulation entirely. The trade-off is that without real financial stakes, the incentive alignment that makes prediction markets accurate is weaker.
International Approaches
Different jurisdictions are taking varied approaches. The UK has a relatively permissive framework under FCA oversight. Some Asian jurisdictions are exploring sandboxes for prediction market innovation. The EU's MiCA framework creates a harmonized regulatory environment for crypto assets that may eventually encompass prediction market platforms operating on blockchain infrastructure.
What Regulation Means for Market Quality
Regulation is a double-edged sword for prediction markets. On one hand, it provides legal certainty, attracts institutional participants, and reduces counterparty risk. On the other hand, it restricts the range of markets that can be offered and increases the cost of operation, which can reduce liquidity.
The ideal outcome for market quality is a regulatory framework that permits a wide range of event contracts while ensuring basic investor protections (fair resolution, transparent order books, adequate capital reserves). Whether any jurisdiction achieves this balance remains to be seen.
Explore these tools on Blockcircle: Prediction Markets Mispricing Engine