NBA hit by illegal gambling scandal as coaches and players arrested—Are prediction markets beneficial or harmful?
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NBA hit by illegal gambling scandal as coaches and players arrested—Are prediction markets beneficial or harmful?
Government regulators and legal experts have warned that insider trading in professional sports could surge as betting shifts toward prediction markets.
Navigating Web3 tides with focused insightsAuthor: Sander Lutz, Decrypt
Translation: Felix, PANews
Late last week, one of the largest gambling scandals in recent years shook the sports world. At the very moment when professional leagues and sports betting companies are enthusiastically embracing the booming prediction market, questions have arisen about whether this convergence might lead to predictable consequences.
On October 23, Chauncey Billups, head coach of the NBA's Portland Trail Blazers, and Terry Rozier, a guard for the Miami Heat, were arrested as part of a federal investigation into illegal gambling activities, including manipulating game outcomes to influence sports betting.
The day before, the National Hockey League (NHL) made history by becoming the first major sports league to sign a licensing agreement with a prediction market. Prediction markets are emerging and highly popular betting websites that have created a sensation in the traditional sports betting sector, yet operate in a kind of legal gray area. On that same day, DraftKings, one of the most popular sports betting sites in the U.S., acquired a prediction market company, aggressively entering this nascent field.
Now, as federal law enforcement turns its attention to insider trading in sports betting, some experts are growing increasingly concerned about the shift from sports betting to prediction markets, while others argue that when these platforms leverage public blockchain networks, they could offer greater transparency.
Former government regulators and legal experts say the transition to prediction markets could make the already difficult task of regulating sports betting even harder, potentially leading to widespread misconduct in sports-related wagering.
Prediction markets allow users to purchase financial stakes in event outcomes via futures contracts. These markets fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC), a federal regulator with little experience overseeing professional sports. For most of its 50-year history, the agency has primarily passively regulated agricultural derivatives such as soybean and livestock futures.
Today, the agency is preparing not only to regulate the rapidly expanding sports prediction market but also much of the cryptocurrency industry—largely due to strong push from the Donald Trump administration.
A former CFTC official, speaking anonymously, said the agency is not only much smaller than other financial regulators but has also undergone significant staff reductions this year, leaving it fundamentally incapable of regulating either the crypto or sports betting industries, let alone both simultaneously.
"I think the U.S. CFTC will be overwhelmed. Cases of insider trading in prediction markets will keep rising because the CFTC isn't monitoring them—they don't have enough personnel to detect these behaviors on their own."
Due to its size and historical mission, the agency relies heavily on whistleblowers and proactive reporting by market participants to root out corruption in its regulated markets. It does not actively hunt for insider trading, and without substantial increases in staffing and funding, it cannot do so effectively in sports markets.
Such changes appear unlikely in the near term. This year, CFTC leadership has been working hard to permanently downsize the agency. Earlier this month, Brian Quintenz, a nominee previously backed by President Trump, saw his confirmation stalled over the summer following conflicts with crypto executives Tyler Winklevoss and Cameron Winklevoss, who strongly opposed many of Quintenz’s plans, including increasing the CFTC's budget.
The billionaire twins (Tyler Winklevoss) argued that expanding the agency’s regulatory capacity would lead to "regulatory capture" (PANews note: a form of political corruption).
Daniel Wallach, a legal expert in gambling and sports betting law, said the U.S. CFTC lacks the capability to regulate sports markets compared to existing state-level sports betting regulations. State laws require stakeholders to proactively combat insider trading and cooperate with law enforcement and third-party integrity monitoring firms.
"In contrast, the CFTC has no sports-specific regulations targeting such activities." "These companies essentially have to self-certify their event contracts and self-police their own integrity."
Over the past year, the prediction business has boomed. Prediction markets allow users to place financial bets on almost anything—from sports and politics to cryptocurrencies and cultural events. On Monday last week, the four largest prediction markets—Kalshi, Polymarket, Limitless, and Myriad—set a record weekly trading volume of $2 billion.
A frequently cited Certuity report estimates that the prediction market industry could reach a value of $95.5 billion by 2035, with a compound annual growth rate of 46.8%. Polymarket and Kalshi currently hold about 96% of the market share, with valuations of $9 billion and $5 billion respectively based on recent funding rounds.
Kalshi, currently the largest U.S.-based prediction market offering sports events, said through a spokesperson that it has built internal systems to identify suspicious trading activity to meet CFTC requirements. The company also stated it has partnered with integrity monitoring firm IC360.
The spokesperson added: "Insider trading is a harmful activity and is explicitly prohibited on Kalshi."
However, legal expert Daniel Wallach believes that with the CFTC clearly making no effort to adapt its regulatory approach to sports markets, companies like Kalshi are effectively left to self-regulate, shifting the power balance between platforms and regulators—a stark departure from the current landscape in traditional sports betting.
"These profit-driven enterprises operate in a regulatory vacuum, setting their own policies, with no constraints or limitations on their ability to trade in this space." "Match-fixing and insider trading have existed since the dawn of sports events, and there are no rules holding these companies accountable."
Top scholars studying prediction markets say these platforms not only fail to curb insider trading but, in principle, are designed to encourage it. Robin Hanson, a professor at George Mason University and widely recognized authority in the U.S. on prediction markets, said in an interview last October: "If the goal of a prediction market is to obtain accurate price information, then you definitely want to allow insiders to trade—even if it discourages others from betting, it makes prices more accurate."
While prediction markets may pose new challenges for regulating misconduct in sports betting, some argue they also offer new opportunities to combat insider trading.
Although Kalshi does not use cryptocurrency in its daily operations, its main competitor Polymarket does—supporters argue this dependency brings greater transparency.
RedStone, an oracle network that prediction markets can use to verify information and settle bets, says Marcin Kazmierczak, co-founder of the network, that because all transactions on platforms like Polymarket are publicly visible on a blockchain ledger, suspicious trading activity becomes easier to detect.
"This transparency alone won’t eliminate insider trading, but it enables large-scale and rapid detection unmatched by traditional systems."
Paul Grewal, Chief Legal Officer at Coinbase, suggested that on-chain prediction markets perform better than traditional betting platforms in preventing crimes like last week’s NBA gambling scandal.
In fact, observers have recently noted several instances of suspicious trading timing on Polymarket. Notably earlier this month, users on the site appeared to correctly predict Nobel Prize winners hours before the official announcement, prompting Norwegian officials to launch an internal investigation.
Yet after this potential insider trading came to light, Polymarket did not announce any investigation into its Nobel Prize market, nor did it issue any statement condemning insider trading.
Instead, Polymarket’s X account shared news of the incident, using the potential scandal as marketing for its product.
"Breaking: It's now revealed that while only five people inside the Nobel Peace Prize Foundation knew the winner, everyone on 'Polymarket' already knew."
Polymarket plans to relaunch in the U.S. soon, after being forced offshore in 2022 for failing to comply with U.S. CFTC regulations.
Although Kalshi and Polymarket differ slightly in their public stance on insider trading, they occupy similar positions within the current U.S. political ecosystem. Both companies have Donald Trump Jr., son of the president, serving as an advisor.
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