Prediction markets are online platforms where individuals purchase and sell shares or event contracts based on outcomes of future events, for example, weather, sports, elections, or economic data. These markets use tradable event contracts to reflect the collective expectations about future outcomes.
A prediction market is a marketplace where a participant can buy and sell contracts that are tied to the outcome of a future event. These contracts are commonly referred to as event contracts.
The contracts gain or lose value based on whether a specific outcome happens. The price of the contract reflects how likely the participants in the market believe the outcome is.
These markets use fluctuating prices to reflect how groups of individuals understand certain outcomes as new information becomes available. An event contract can be created for a variety of events, including entertainment, sports, economic news, or business goals.
Although prediction markets involve trading contracts similar to financial markets, the goal is different. Additionally, these markets are not the same as more traditional investments, such as bonds, stocks, or ETFs.
Prediction markets are one-of-a-kind in the way that event contracts are created, traded, and paid out. Typically, the steps involved in prediction markets include:
- The specific event is clearly defined, commonly with a yes-or-no outcome, so a contract can be paid out objectively.
- Every outcome is assigned a tradeable event contract.
- These are commonly structured as a yes-or-no contract that pays a fixed amount when the outcome happens.
- Purchasers and sellers make transactions based on expectations.
- New trades will shift the prices as supply and demand change.
- Once the event outcome is known, event contract trading stops.
- The winning contracts are settled at their payout value and the losing contracts expire worthless.
With prediction markets, participants trade event contracts directly with one another. The platform facilitates trades and collects transaction fees.
The platform does not take a position on the outcome, unlike traditional betting platforms. These contracts are also different from traditional investments.
The value of the contract does not depend on dividends, earnings, or long-term growth. Instead, the contract’s value is determined by whether a specific event occurs.
What Are Some Common Types of Prediction Markets?
Prediction markets have been applied to nearly any topic, including entertainment events, sports betting, including parimutuel betting, economic issues and decisions, military actions, political outcomes and legislative actions, and business and technology issues, such as mergers and product launches. In other words, predictions are being made on just about anything. The event must have a clearly defined outcome that can be verified by an agreed-upon source.
The source is usually specified in advance by the exchange. Commonly used sources may include certified election results, league records, or a statement from a recognized authority that is responsible for reporting on the event.
Both prediction markets and sports betting allow individuals to put money on future and uncertain outcomes. Both of these involve risking money on an event that has not yet occurred.
Both let users place money on point spreads, player statistics, and game winners. Winning on either platform requires that someone correctly guesses a future result. Both formats reflect the perceived likelihood of an event occurring, whether through contract prices or odds.
Are Prediction Markets Legal?
In the United States, prediction markets are legal under federal law because they operate as event contract exchanges that are regulated by the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act. Legality at the state level, however, varies significantly depending on the jurisdiction and the type of contract being traded.
Prediction markets are primarily regulated at the federal level by the CFTC as financial derivatives and event contracts instead of as traditional gambling under gaming law and gambling laws.
The CFTC treats event contracts as swaps or futures. This means they are not governed by the Unlawful Internet Gambling Enforcement Act of 2006.
Platforms may operate as peer-to-peer exchanges where users trade event contracts at prices that are market-driven instead of betting against a house. There are regulatory bodies and exchanges that enforce rules against market manipulation and insider trading, which leads to high-profile bans as well as fines for individuals who are misusing private information.
There are variations in what is considered legal across different states involving many different types of gambling, including lottery laws and games of skill vs games of chance, so it is important to reach out to a local attorney for more information. A local lawyer can also answer any other question an individual may have, such as, “Is online gambling legal?” or, “Is gambling with friends illegal?”
If an individual needs help with gambling debt, a local attorney may also be able to give them information on where to get assistance.
Are Prediction Markets Vulnerable to Insider Trading?
The risk of insider trading is amplified because of the precision of some of the contracts offered, as some types of highly specific outcomes may be easy to manipulate. These markets also involve contracts based on micro-decisions that are based on very specific types of knowledge. For example, insiders can easily trade on private intelligence data or operational data.
Are There Any Legal Consequences for Engaging in Prediction Markets Illegally?
Yes, there may be significant legal consequences for engaging in prediction markets illegally, such as criminal prosecution, substantial financial penalties, federal imprisonment, and regulatory bans.
Examples of consequences an individual may face include, but may not be limited to:
- Petty misdemeanor charges under some state laws for wagering on election outcomes in which an individual is running
- Violations of gambling and gaming regulations because some prediction markets are viewed as a form of online gambling
- This means that if an individual participates in a restricted jurisdiction, they may face state-level illegal gambling and tax evasion charges.
- If an individual trades on prediction markets using stolen or confidential information, they may be prosecuted under broad federal commodities fraud and federal wire fraud statutes
- Insider trading charges, especially when specific types of data is used to place wagers
How Can I Identify Illegal Prediction Markets?
An individual can identify an illegal prediction market by checking for a federal registration with the CFTC. In the U.S., a platform offering event contracts to the public generally should be registered with, exempt from, or otherwise operating under authority recognized by the CFTC. Many retail event-contract markets operate through CFTC-registered designated contract markets. If a platform is not registered and does not explain its regulatory status, that is a warning sign.
They have to explicitly provide their CFTC-regulated status as well as list their compliance metrics on their platforms. If a platform offers binary event contracts to United States citizens without federal oversight, it is illegally operating.
How To Report Illegal Prediction Markets
An individual can report market manipulation, illegal prediction markets, or unregistered gambling operations directly to the CFTC Whistleblower Program or to the FBI Tip Line.
They can also report illegal or unauthorized intrastate gambling operations to the state Gaming Commission or Attorney General if the platform violates state laws. Reports can also be filed through the SEC Whistleblower Program when securities-based fraud is involved.
How Can an Attorney Help Me if I’ve Been Involved in an Illegal Prediction Market?
If an individual has been involved in an illegal prediction market, their lawyer can help them in many different ways, such as ensuring their rights remain protected, negotiating and communicating with federal and state regulators, and building the best possible defense if they are facing scrutiny over a prediction market.
A lawyer can assess whether the issue falls under federal or state laws, inform their client about the allegations against them, such as fraud or using non-public information, and review their trading history to determine their legal and financial risk.
An attorney will also advocate on their client’s behalf during any CFTC or Department of Justice inquiries, communicate on behalf of their client with law enforcement and platform operators, and work to reduce potential criminal charges and civil liabilities.
Do I Need a Lawyer for Help with a Prediction Markets Issue?
If you have any type of prediction market issue or concern, it is very important to reach out to a criminal lawyer, even if the question is just as simple as making sure it is legal to participate in a prediction market in your state. If you are facing any type of criminal charge related to your participation in a prediction market, it is necessary to have a lawyer represent you to ensure your rights are not waived and you have the best possible defense.
In a short time, LegalMatch’s free lawyer-client matching services can help you find a criminal lawyer near you in your state who can help you resolve any prediction market matter you may have.
