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Prediction markets are moving from the periphery of finance into the regulatory mainstream, emerging as a tool for pricing uncertainty in real time.
They challenge a core assumption of financial systems: that markets exist to price assets. Instead, they assign probabilities to future events—creating a new layer of market-based intelligence for capital allocation, risk management and strategic decision-making.
Regulators are now defining how these markets fit within existing frameworks. The direction of travel is clear: cautious acceptance, with increasing focus on governance, market integrity and the boundaries of permissible contracts.
For financial institutions, the opportunity is significant—but so are the regulatory, conduct and reputational risks. Early engagement will be critical.
The question is no longer whether prediction markets will exist, but whether they can be shaped into a credible and economically valuable part of the financial system.
For much of their history, prediction markets sat at the periphery—associated with academic experiments, niche retail platforms or loosely supervised online activity. That positioning is no longer tenable. In the U.S., the Commodity Futures Trading Commission (CFTC)’s recent Advanced Notice of Proposed Rulemaking (ANPRM) on event contracts marks a clear inflection point.
The CFTC’s consultation reflects a shift from ambiguity to structured oversight. By seeking input on how core principles under the Commodity Exchange Act apply to prediction markets—contract design, governance and surveillance—the Commission signals that these markets now sit within the regulatory perimeter. This broader question of boundaries is increasingly relevant across jurisdictions, as highlighted by the Financial Conduct Authority’s (FCA’s) recent Perimeter Report, which underscores the difficulty of categorising emerging activities such as event-based markets.
In the U.S., the “public interest” test sits at the centre of the debate—a long-standing but rarely prominent provision allowing the CFTC to prohibit contracts deemed contrary to societal objectives. Its renewed prominence is telling. Prediction markets are not simply another derivative product; they raise fundamental questions about what types of events should be tradeable.
At the same time, the CFTC has reaffirmed that event contracts fall within its jurisdiction as derivatives, capable of supporting hedging, portfolio exposure and providing forward-looking price signals. Recognition of utility alongside tighter scrutiny mirrors broader regulatory responses to innovation, from cryptoassets to complex derivatives.
The regulatory landscape remains unsettled. In the U.S., tensions between federal derivatives oversight and state-level gaming laws highlight a deeper issue: whether prediction markets are financial instruments or a form of regulated betting. This is not a new tension. In 1888, the Illinois Supreme Court ruled that trading grain futures was illegal gambling—a decision that ultimately did not hold, as Chicago went on to become the commodities trading capital of the world. The question today is similarly foundational, unlikely to be resolved quickly, and increasingly relevant across jurisdictions.
Binary options provide the closest historical reference: like prediction markets, they offered simple, event-driven payoffs. In practice, they became synonymous with fraud, mis-selling and opaque pricing, particularly in retail markets. The regulatory response—most notably in Europe—was decisive, culminating in outright bans.
While payoff structures in prediction markets may be similar, the context has evolved. Today’s platforms are increasingly exchange-based, subject to surveillance, and in some cases integrated into broader financial infrastructure. More importantly, they are framed not merely as speculative products, but as mechanisms for aggregating information and improving forecasts.
This distinction matters. Regulators are not revisiting a known risk category; they are assessing whether a similar structure can deliver a fundamentally different function. The objective is therefore more nuanced: to avoid repeating past failures without foreclosing a potentially valuable tool for risk management and hedging.
Prediction markets are not homogeneous and have evolved into four distinct business models.
The most visible model is the retail-facing platforms, where users trade event contracts—often on political, macroeconomic or cultural outcomes—through interfaces resembling trading or betting applications. Revenues are typically derived from spreads or fees. The risks are familiar: consumer protection concerns, behavioural biases, and a drift toward gambling-like activity. This segment most closely echoes binary options and is likely to remain the focus of conduct regulation.
A second model is developing within the traditional financial system. Here, prediction markets function as a subset of derivatives trading, operating through regulated exchanges. The CFTC has acknowledged their role in hedging event-driven risks, managing portfolio exposure and providing forward-looking price signals. This model aligns with existing frameworks but introduces new questions around contract admissibility and market abuse.
A third model has emerged through decentralised, blockchain-based platforms. These enable peer-to-peer trading via smart contracts, and reflect broader digital asset trends. While they offer accessibility and programmability, they also raise challenges around jurisdiction, enforceability and manipulation. Enforcement actions highlight the limits of perimeter-based supervision in borderless markets.
Finally, a less visible but potentially more consequential model is developing within financial institutions. Internal prediction markets are being used to support forecasting, aggregate expert judgment, and inform strategy. While largely outside formal regulation, they may increasingly intersect with external markets as their influence grows.
Taken together, these models suggest prediction markets are not a single innovation but an ecosystem spanning retail, institutional, decentralised and enterprise applications.
The CFTC has made clear that existing anti-fraud, anti-manipulation and insider trading rules apply. However, prediction markets introduce more complex integrity challenges.
In conventional markets, insider trading involves non-public information about asset performance. In prediction markets, outcomes may depend on decisions by governments, regulators or corporates—decisions that may be known in advance or influenced by participants themselves.
This raises difficult questions about what constitutes insider information when the underlying event is a policy decision, and how to treat participants who can influence outcomes. Existing frameworks may not fully capture behaviour involving “trading on influence” rather than information.
Prediction markets blur the boundary between information asymmetry and outcome control, creating risks that existing regulatory systems were not designed to address.
At the core of the debate lies classification: are prediction markets financial instruments or a form of gambling?
The CFTC’s position reflects this tension. It asserts jurisdiction over event contracts as derivatives—recognising their role in hedging, price discovery and risk management—while retaining the authority to prohibit those contrary to the public interest.
In practice, the distinction is not always clear. However, contracts linked to macroeconomic indicators or geopolitical outcomes are increasingly treated as financial instruments, particularly where they support portfolio management, hedging and forward-looking price discovery.
This ambiguity is likely to persist, with jurisdictions drawing boundaries differently and creating potential for fragmentation and arbitrage.
The strongest case for prediction markets is not novelty, but usefulness.
Research from the Federal Reserve earlier this year, using Kalshi’s data on the federal funds rate and CPI, found statistically significant improvements over fed funds futures and professional forecasters. The mode of the Kalshi distribution, for example, has matched the realised federal funds rate by the day of each meeting since 2022—a feat not achieved by either surveys or futures.
The researchers concluded that these markets capture rich distributional dynamics—such as tail risks and asymmetries in higher moments—that are unavailable from traditional sources. Accessibility to retail traders introduces a perspective distinct from institutionally dominated markets, offering a complementary lens on expectations formation.
These findings suggest that prediction markets can complement existing forecasting tools. In the three months since the study, monthly liquidity has increased by approximately two-thirds, reinforcing their growing relevance. As these markets mature and liquidity deepens, their potential will continue to expand.
As risks become more complex and increasingly shaped by geopolitical and domestic political developments, the ability to price uncertainty in real time becomes more valuable. Disruptions to U.S. official data publication in late 2025 illustrate how political dynamics can affect traditional economic data inputs.
Over time, prediction markets may evolve into a complementary layer of financial infrastructure, sitting alongside traditional asset classes and providing a market-based view of future states. Their convergence with AI and advanced analytics could accelerate this shift. Their effectiveness, however, depends on participation—strongest in broad, high-engagement environments, and weaker in thin markets or where herd behaviour dominates.
Prediction markets present both strategic choices and challenges.
For regulators, the priority is to define clear boundaries—what is permissible and why—while avoiding fragmentation across jurisdictions and regulatory domains. Divergent approaches risk pushing activity into less regulated environments.
Supervisory frameworks will also need to evolve. Traditional market integrity tools may not be sufficient for outcome-based markets.
For financial institutions, prediction markets offer new tools for insight and risk management but introduce regulatory, conduct and reputational complexity. Early engagement—with both markets and regulators—will be critical.
Prediction markets are not yet a fully formed asset class, but they are clearly moving in that direction. As geopolitical and domestic political shocks become more frequent—reflecting increasingly polarised electorates—and supervisors require firms to actively manage these risks, the value of tools that can price uncertainty in real time will only increase.
The regulatory trajectory suggests cautious acceptance. The commercial trajectory points to growing institutional relevance. The technological trajectory indicates deeper integration into decision-making.
The question is no longer whether prediction markets will exist, but whether they can be shaped into something credible and economically valuable.
For regulators, governance is central. As with other event-based markets, such as credit default swaps (CDS), governance frameworks—including ISDA Determinations Committees—emerged to standardise how events are defined and resolved, enabling markets to mature.
For financial institutions, this is a question of opportunity and risk. For both, it is ultimately about whether the financial system is ready to price not just assets—but the future itself.
Commodity Futures Trading Commission (2026), “CFTC Enforcement Division Issues Prediction Markets Advisory,” February 25, 2026. https://www.cftc.gov/PressRoom/PressReleases/9185-26
Commodity Futures Trading Commission (2026), CFTC Letter No. 26-08, March 12, 2026. https://www.cftc.gov/node/258331
Financial Conduct Authority (2026), Perimeter Report, March 2026. https://www.fca.org.uk/publications/corporate-documents/fca-perimeter-report
Anthony M. Diercks, Jared Dean Katz, and Jonathan H. Wright, Finance and Economics Discussion Series, 2026-10, Federal Reserve Board, “Kalshi and the Rise of Macro Markets” (2026). https://www.federalreserve.gov/econres/feds/files/2026010pap.pdf
International Swaps and Derivatives Association (ISDA), Determinations Committees overview and documentation. https://www.isda.org/2018/10/12/credit-derivatives-determinations-committees/
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