Could whistleblowers be the ones to rein in prediction markets?
Polymarket and Kalshi are blowing up. Although they are prime spaces for insider trading or money laundering to take place, they remain largely unregulated by the Trump administration.
Hours before former Venezuelan president Nicolas Maduro was captured in January, an anonymous trader placed a series of bids about Maduro’s arrest on the prediction market Polymarket. Because they had such high certainty that this event was destined to happen, the anonymous trader pocketed $400,000.
Making bets in this way–not just on financial markets, but on the likelihood of future events to occur or unfold–has become one of the hottest products in tech, proliferating beyond sports and crypto and into entertainment, politics, and culture. My colleague Alex wrote about Google’s bet on Kalshi and Polymarket a few months ago, but since then, prediction markets have become even more present in the culture. Substack and Polymarket are now partnering to bring markets-based insight to journalism. People are even dispassionately predicting the future of strikes in Gaza and Iran.
The platforms are capitalizing on the realization that people are obsessed with being smart enough to know what’s fact or fiction–or, in the right place to know ahead of time what’s bound to happen or not.
In one marketing stunt a few weeks ago, Polymarket literally fabricated reality, posting a fake quote from Jeff Bezos that people need to have real-world job experiences at “companies like McDonald’s and Palantir” before becoming entrepreneurs. Another time, the CEO of Coinbase decided to fulfill the future reality of traders who betted on the prospect that he would say five words during an earnings call, which one trader excitedly called “breaking the fourth wall.”
Young men in particular are attracted to this kind of betting, drawn to chasing their “alpha,” meaning their seconds-ahead “edge” on bets that could come from quantitative prowess, some very thorough online sleuthing, or insider information.
I spoke with Daren Firestone, a whistleblower lawyer who has represented a number of crypto whistleblowers, about the potential for insider information to be misused in prediction markets. Firestone says that there is a significant difference between someone who is a well-researched and informed bettor and someone who is trading on material non-public information. (The former is probably legal, the latter is probably not.)
“If you follow boxing so well that you know someone has a cold, you can predict the win or loss better,” says Firestone. “But if you’re a boxer and you throw a fight [for the money], that’s insider trading.”
According to Firestone, a lot of these people on prediction markets have the understanding that it’s all rigged, but they think that they are smart enough to know when the pump is ending and the dump is starting. “These people are thinking, I’m going to keep playing the game because I’m not a sucker,” he continued.
Yet not everyone can game the system in the way they hope to–not because they are a “sucker,” but because it’s not totally fair. A few weeks ago, a poster on X implored Kalshi’s compliance team to investigate after they lost over $9,000 to anonymous bettors who confidently put down $500,000 on the prediction that Lady Gaga would perform with Bad Bunny at the Super Bowl. And a recent Business Insider report told the stories of people, mostly young men, who lost tens of thousands of dollars and had to take out loans to place more bets on basketball and football games.
These prediction market companies are largely regulated by the Commodities Futures Trading Commission, an agency with far fewer enforcement resources than the Securities and Exchange Commission or the Department of Justice. In other words, given resource limitations, there may be very little checks on something like the Lady Gaga trade, unless the companies themselves decide to look into it.
While Firestone hasn’t had whistleblowers cases in the prediction markets yet, he believes that eventually, an insider may bring forward information about insufficient Know Your Customer (KYC) or Anti-Money Laundering (AML) programs at their employers.
Dave Jochnowitz, a whistleblower lawyer with the employment law firm Outten & Golden, says that the type of whistleblower who works for these prediction market companies usually join the company starry-eyed about “financial innovation,” only to find out that the the product isn’t what they thought it was–or that there may not be a product at all.
“These are young, very smart kids–usually young excitable white dudes or ambitious East Asian women–who think that joining these companies is the cool thing to do where they can blend computers, money, and finance,” says Jochnowitz. “The language in recruiting them is ‘you’re designing the future of finance’ or ‘the future of what the markets look like.’ But rather than that, what they’re actually doing is figuring out how to draw the most money out of people that you can. They start to get worried about their reputations.”
He and Firestone both predicted that outsiders may also be viable whistleblowers, either because they have been scammed themselves or because they have traced trades to identify someone who is insider trading.
I find this craze to predict the future as representative of two cultural undercurrents. One, people do want to escape from their mundane existences. This has always been the allure to something like sports gambling or games at casinos, to provide a respite from our daily moments of boredom or feelings of insignificance. And two, people desperately want some semblance of control over their future–or just the future in general. The combination–of believing one can predict the future and make easy money from it–can start to feel god-like in a massively addicting way.
It also fits into this idea, perpetuated by Donald Trump, that the world as run by capitalism is divided into “winners” and “losers.” In reality, in many cases, it’s actually being rigged to create this division.
My prediction is that more trades on non-public information will start to piss off bettors who want real competition, not a stacked outcome. And also, in theory, a whistleblower could make more money from a whistleblower reward than any money they make on the prediction markets. In lieu of government agencies having the resources to investigate on their own, the incentive of a whistleblower reward from someone sufficiently upset by an insider trade or violation of espionage rules, for example, may catalyze reports.
Whether the rise of potential insider trading causes an exodus from the platforms or meaningful change in how those trades are vetted remains to be seen. But will more whistleblowers come forward with information about prediction markets? I’d bet on it.