Prediction markets that allow wagers on election outcomes and other political events have gained significant attention amid growing concerns over their potential impact on democratic processes and risks of insider trading. Two leading platforms, Kalshi and Polymarket, have recently faced scrutiny for posts by influencers with financial stakes in ongoing political races, prompting the companies to enforce guidelines requiring removal of certain content or labeling.

The platforms facilitate trading on future events, enabling users to buy contracts predicting outcomes such as electoral victories. For example, ahead of the November Los Angeles mayoral race, Kalshi reported more than $117 million in trading volume on contracts tied to the contest. Contracts betting on incumbent Mayor Karen Bass’s victory indicated a 63 percent chance of success, reflecting market probabilities derived from users’ investments.

Advocates argue these markets offer a more accurate alternative to traditional political polls by focusing on financial commitments rather than public statements, potentially filtering out media and social media noise. Kalshi spokesperson Dani Lever stated that this approach provides unique clarity and predictive power. Research by economist Koleman Strumpf of Wake Forest University suggests that prediction markets, which have existed in various forms for three decades, generally produce reliable forecasts and that most bets are made based on careful analysis.

However, critics warn that these markets introduce new risks to election integrity. Concerns focus on the possibility that market odds could influence donor behavior, media coverage, and volunteer enthusiasm, effectively making the markets participants in the political process rather than mere observers. Davina Hurt, director of government ethics at the Markkula Center for Applied Ethics, emphasized that elections are not games and cautioned about the consequences if market forecasts begin to shape democratic engagement.

Legal and ethical questions also arise about insider trading. High-profile cases have triggered investigations, including an Army soldier indicted for allegedly profiting from confidential knowledge about a planned U.S. operation against former Venezuelan leader Nicolás Maduro. Other reports claim anonymous traders earned millions betting on geopolitical conflicts such as the Iran war, while politicians have faced fines or probes related to wagering on their own electoral outcomes. These developments have sparked congressional inquiries, with the House Oversight Committee initiating investigations into potential insider trading within prediction markets and legislators proposing bills aimed at imposing regulatory guardrails.

The Commodity Futures Trading Commission (CFTC), which oversees these platforms, recently proposed a new regulatory framework intended to address lawmakers’ concerns while allowing legitimate market activity. The agency has seen shifts in approach between administrations. Under President Biden, the CFTC was viewed as cautious toward prediction markets, whereas the Trump-era agency, in which President Trump’s eldest son holds advisory roles at both Kalshi and Polymarket, was regarded as more industry-friendly.

Some elected officials, including Sen. Adam Schiff and Rep. Mike Levin, criticize the current regulatory efforts as insufficient, expressing skepticism about the platforms’ capacity to self-police risks related to misinformation, insider trading, and election manipulation. Assemblymember Maggy Krell of California has also raised alarms about the potential for markets to become conduits for untraceable financial influence in elections, noting the danger that bettors could manipulate candidate support to sway broader political dynamics.

Both Kalshi and Polymarket assert they have measures in place to prevent abuses, such as screening users, banning specific markets like death or war bets, and referring suspicious activity to law enforcement. Polymarket said it has referred nearly 100 cases of possible illegal conduct, including the soldier’s Venezuela-related bets, to federal authorities. Notably, Polymarket does not offer election contracts on its U.S. exchange but acknowledges that international users can still access these markets via online tools.

As these platforms continue to expand amid evolving legal battles at state and federal levels, experts caution that regulatory pressures will intensify. Aaron Klein, a senior fellow at the Brookings Institution, underscored the importance of safeguarding “free and fair elections,” particularly given prevailing concerns about election integrity and foreign interference. The intersection of democratic governance and market-based prediction tools remains a focal point of debate, with stakeholders weighing potential benefits against risks to the political system’s transparency and fairness.