US crackdown grows as California leads with ban on insider prediction market profits

The Governor of California, Gavin Newsom, recently signed an executive order that introduces additional regulations to prohibit public officials and their close associates from profiting from insider trading in prediction markets linked to economic or political events they can influence or are aware of.

To demonstrate the intensity of the situation, sources familiar with the matter said this order prevents gubernatorial appointees from using insider knowledge acquired through their positions for personal gain in prediction markets. Notably, Gubernatorial appointees are individuals selected by the Governor to lead state departments and agencies and to serve on boards, commissions, and judicial benches, often requiring Senate confirmation. 

Meanwhile, in addition to this regulation, Newsom’s executive order also restricted family members, spouses, or former business partners of appointed officials from using non-public information for self-enrichment. According to the Governor, public service should not be viewed as a means for rapid financial gain.

“While Trump’s Washington is filled with ethical problems and insider profits, California is setting a clear standard: If you work for the public as a political appointee, your duty is to serve the public—end of story. We won’t accept this type of corruption in California,” he added. 

California strengthens its oversight of prediction markets

Newsom’s statement outlined several incidents in which political insiders use private information from prediction markets for personal gain. An example of this case is the reported incident of six suspected insiders who gained significant amounts of money from the US strikes on Iran.

Another case of potential insider trading occurred earlier this year, when reports revealed that a trader on Polymarket secured around $410,000 by betting on the arrest of former Venezuelan president Nicolás Maduro a few hours before it happened.

In the meantime, sources highlighted that these issues are also gaining attention in Congress, citing the introduction of the PREDICT Act by lawmakers from both parties this week.

The main aim of this proposal is to prevent members of Congress, federal officials, and their families from trading event contracts based on the outcome of policy decisions, political events, and other government actions.

To emphasize the critical nature of the circumstances, the proposal stressed that those breaching this regulation would be required to surrender all profits to the US Treasury, in addition to a 10% penalty.

Responding to the situation, major players in the prediction market, Polymarket and Kalshi, imposed several measures to mitigate these issues. For instance, they implemented restrictive measures to limit the engagement of individuals with direct influence over outcomes, while strengthening existing regulations against insider trading and market manipulation this week.

Meanwhile, despite the insider trading challenge, several individuals have shown heightened interest in prediction market platforms over the past year, thereby increasing their popularity and driving a continuous upward trajectory. To support this claim, data from reliable sources disclosed that both Kalshi and Polymarket achieved more than $20 billion in combined monthly trading volume for the first time this month, extending a record-setting streak to seven consecutive highs.

At this moment, sources noted that Newsom is widely seen as a contender for the presidency in 2028, with his chances of becoming the Democratic nominee currently pegged at 24% on Polymarket and 27.4% on Kalshi.

Regarding these results, several reporters reached out to the California governor for comment about his potential presidential run and Kalshi’s odds identifying him as the frontrunner for the Democratic nomination during his visit to San Francisco on February 19th. In response to the request, Newsom described the speculation as wildly premature, choosing instead to focus on prediction markets, arguing that “Kalshi is interesting for different reasons.”

Kalshi achieves a significant milestone in its operation 

While California strengthened oversight of prediction markets, sources noted that Kalshi secured a license that allowed it to offer margin trading to its users. Regarding this significant milestone, several analysts noted that this addition would enhance the platform’s appeal to institutional investors.

This announcement was made public after a filing with the National Futures Association on March 24 highlighted that the firm has received authorization to operate as a futures commission merchant through an affiliate, Kinetic Markets LLC. 

Nonetheless, reports highlighted that Kalshi still requires the Commodity Futures Trading Commission’s approval for rule changes that would allow non-full collateralized trading.

This situation unveils that while prediction platforms seek to attract institutional investment, regulatory uncertainty regarding the definition and treatment of these markets persists.

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