As prediction markets move steadily into the mainstream, compliance teams and regulators are facing a deceptively simple but increasingly urgent question: who is actually in charge?
According to StarCompliance, the growing popularity of event-based contracts, particularly those tied to corporate performance or financial outcomes, is stretching the limits of existing securities, commodities and gambling frameworks.
For firms operating in or adjacent to these markets, jurisdictional uncertainty is fast becoming a material compliance risk rather than a theoretical debate.
At their core, prediction markets operate as exchanges where participants trade outcome-based contracts whose prices represent the collective probability of future events. While the concept itself is not new, the sophistication and scope of modern prediction markets is. Contracts can now reference elections, macroeconomic indicators, company-specific events and even financial instruments, blurring lines that regulators have historically relied on to determine oversight.
These issues were recently explored in a discussion with Troy A. Paredes, former Commissioner of the U.S. Securities and Exchange Commission. He highlighted how the current regulatory landscape in the U.S. remains fragmented, with oversight divided between the SEC, the Commodity Futures Trading Commission (CFTC) and state-level authorities. Which regulator takes the lead often depends on whether a product looks more like a security, a security-based swap, a future or a commodity interest. As event contracts become more complex and financially linked, those distinctions are becoming harder to apply in practice.
“Regulatory lines may remain blurred, but compliance responsibilities are anything but.” – Troy A. Paredes
Beyond formal classification, regulators may increasingly rely on a range of regulatory “hooks” to bring prediction market activity within scope. This could include data linkages or correlations between prediction market trading and traditional securities markets. For compliance teams, this raises important questions around how broadly phrases such as “in connection with the purchase or sale” might be interpreted, particularly if algorithmic trading or shared data signals begin to connect the two environments. What starts as a novel market structure could quickly become a regulatory highway.
Even where jurisdiction remains unclear, enforcement risk does not disappear. Authorities such as the Department of Justice retain the ability to pursue cases under mail and wire fraud statutes, regardless of whether an asset falls neatly under SEC or CFTC oversight. The prosecution in U.S. v. Chastain demonstrated how traditional misappropriation and property concepts can be applied to emerging digital assets, reinforcing a broader lesson for compliance teams: anti-fraud and anti-manipulation rules apply universally, even in regulatory grey zones.
Market behaviour reflects this uncertainty. A recent study by StarCompliance asked whether firms permit employees to participate in prediction markets, and the overwhelming answer was “No”. Most respondents explicitly prohibit participation, particularly in markets linked to financial instruments or securities. However, many also acknowledged that formal policies and procedures are still evolving, with firms reviewing their approach amid unclear regulatory expectations.
This ambiguity underscores the need for a proactive compliance and risk management response. Firms cannot afford to wait for definitive regulatory guidance before acting. Practical steps include updating internal policies to address event contracts tied to specific companies, introducing employee disclosure or attestation requirements, and carefully balancing privacy considerations with monitoring obligations. Anticipating how regulators might interpret these activities can significantly reduce both regulatory and reputational exposure.
Real-world developments continue to highlight the pace of change. DraftKings’ recent launch of a prediction market app in parts of the U.S. without legalised sports betting illustrates just how fragmented and fast-moving the environment has become. This mirrors broader challenges seen across digital assets, where innovation consistently outpaces regulation.
The bottom line for compliance teams is clear. Prediction markets are pushing the limits of existing regulatory definitions, and jurisdictional uncertainty is unlikely to disappear anytime soon. Navigating this space will require vigilance, adaptability and a willingness to engage early with emerging risk models, rather than waiting for the rules to catch up.
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