Inside the Prediction Market Control Environment: Operational Practices, Emerging Risks, and Regulatory Expectations

Key Takeaways:

• Prediction market platforms increasingly combine gaming-style controls with financial-services practices, creating a convergence that demands a more sophisticated control environment than either framework alone.
• Customer onboarding, KYC, and AML controls need to reflect both the gaming-side requirements (age, geolocation, self-exclusion) and the financial-services requirements (customer identification, sanctions screening, suspicious activity monitoring).
• Market surveillance, best execution, and position limits are becoming central to platform operations, particularly as regulators focus on manipulation risk, insider trading, and fair order handling.
• Governance, clearing, and capital controls should evolve as platforms adopt financial-market features, with mature platforms establishing formal committees, independent compliance functions, and appropriate segregation of customer funds.
• Financial institutions entering the prediction market space face heightened regulatory expectations around disclosure, conflicts of interest, and customer protection, requiring clear standalone disclosures and product-specific acknowledgments.

The growth of predication markets has raised important questions about when a prediction market platform begins to function like a financial intermediary and why its internal control environment should reflect the activities it performs — not merely the regulatory label it carries. This is even more critical with news that the State of New York has sued Kalshi for running, what they alleged and interpret to be, an illegal gambling operation. This article takes a deeper dive at how that convergence is occurring operationally.

Prediction market platforms increasingly combine gaming-style controls, such as age verification, geolocation, self-exclusion, and responsible-gaming restrictions, with financial-services practices involving customer identification, anti-money laundering monitoring, sanctions screening, market surveillance, order handling, position limits, clearing, settlement, and the safeguarding of customer funds.

Customer Onboarding, Know Your Customer (KYC), and Anti-Money Laundering (AML)

Customer onboarding is one of the clearest areas of convergence between prediction market platforms and financial intermediatory, particularly in how an organization vets their customers prior to activity. Gambling platforms generally focus on age, jurisdiction, geolocation, self-exclusion, responsible-gaming status, and prohibited participants. Broker-dealers must maintain a written Customer Identification Program (CIP) as part of their AML program, including risk-based procedures to verify customer identity and form a reasonable belief that the firm knows the customer’s identity.

Prediction markets may need both. A sports-related event contract may require gaming-style controls to confirm location, age, and eligibility. At the same time, a tradable account with deposits, withdrawals, order entry, and settlement obligations requires financial-services controls: identity verification, sanctions screening, account ownership checks, suspicious activity monitoring, and escalation procedures.

AML requirements also overlap. Casinos must file suspicious activity reports with FinCEN for certain suspicious transactions involving or aggregating at least $5,000. Broker-dealers operate under their own AML and customer identification obligations. Prediction markets may present additional AML risks because customers can move funds through deposits, trades, offsetting positions, and withdrawals while disguising the economic purpose of the activity.

Market Surveillance and Best Execution

Market surveillance is another sign that a platform has crossed into financial intermediary territory. A sportsbook monitors suspicious wagering, match-fixing indicators, insider sports information, and unusual account behavior. A financial market may monitor wash trading, spoofing, manipulation, collusion, misuse of nonpublic information, and concentration risk.

Prediction markets require an expanded surveillance model because the underlying event may be influenced by market participants or known in advance by insiders. The Commodity Futures Trading Commission’s (CFTC) Division of Enforcement issued a 2026 advisory after enforcement cases involving misuse of nonpublic information and fraud in prediction markets traded on KalshiEX, a designated contract market. The CFTC’s Division of Market Oversight also issued a 2026 advisory reminding designated contract markets of their obligations when listing event contracts, including obligations under CEA Section 5(d), Part 38, Core Principle 3, and product submission requirements.

Best executionis also relevant. A traditional sportsbook posts odds, and the customer chooses whether to accept them. But when a platform routes orders, operates an order book, internalizes flow, uses affiliated market makers, or matches customer interest, fair execution becomes a core control issue. FINRA Rule 5310 requires broker-dealers to use reasonable diligence to obtain the best market for a customer order so that the resulting price is as favorable as possible under prevailing market conditions. Prediction markets may not always be subject to broker-dealer best execution rules, but regulators and boards should still ask whether order handling, routing, pricing, and liquidity arrangements are fair, transparent, and free from undisclosed conflicts.

Governance, Compliance, Clearing, and Position Limits

As online gambling and prediction markets adopt financial-market features, their governance should evolve as well. A mature platform should have formal governance committees for product approval, market surveillance, AML and sanctions, conflicts of interest, customer protection, responsible gaming, clearing and settlement, and operational resilience. The compliance function should have independence, authority to escalate concerns, access to data, and the ability to recommend pausing or delisting products.

Clearing is especially important. A platform that facilitates clearing or settlement is no longer merely offering entertainment; it is managing counterparty and liquidity risk. CFTC-registered derivatives clearing organizations must comply with core principles covering financial, operational, and managerial resources; risk management; settlement; protection of funds; default rules; governance; and conflicts of interest.

Position limits are also central. Sportsbooks impose limits to manage house exposure. Financial markets impose position limits to reduce manipulation, congestion, concentration, and disorderly trading. Prediction markets need a similar framework, particularly where a trader may influence the event outcome or where concentrated positions could distort pricing.

Capital requirements complete the financial-intermediary analysis. Broker-dealers are subject to financial responsibility rules, including net capital and customer protection requirements. The SEC describes the net capital rule and customer protection rule as the foundation of the securities industry’s financial responsibility framework. Futures commission merchants must segregate customer funds from their own funds, and FCMs are subject to minimum adjusted net capital requirements. If a prediction market or affiliated financial institution holds customer funds, guarantees settlement, extends credit, or supports leveraged trading, capital and segregation controls become critical.

Should the Regulatory Framework Evolve?

The regulatory framework should evolve into a more effective approach such as functional regulation.

Under a functional framework, the applicable rules would depend on what the platform actually does. If it offers gambling, it should meet gaming-law requirements. If it lists CFTC-regulated event contracts, it should meet derivatives-market requirements. If it effects securities transactions, it should use an appropriate broker-dealer, exchange, or ATS structure, and so on.

Recent CFTC activity suggests that regulators are already reconsidering how prediction markets should be supervised. In March 2026, the CFTC sought public comment on whether to amend or issue new regulations for event contracts traded on prediction markets. In June 2026, the CFTC proposed amendments to its rules concerning event contract derivatives, including a proposed definition of “gaming” and factors for public-interest determinations.

Online gambling and prediction markets are no longer limited to isolated wagers. They increasingly involve continuous trading, mobile access, market prices, liquidity providers, influencers, affiliate relationships, institutional participation, and financial-platform distribution. A regulatory model built only around the historical distinction between “gambling” and “investing” may not adequately address the risks.

Implications for Financial Institutions

When a bank, broker-dealer, investment platform, fintech, or other financial institution enters the prediction market business, regulators may have heightened concerns. Customers may assume that a product offered by a financial institution is an investment product rather than entertainment or wagering. The institution may also have access to nonpublic information, customer trading data, payment data, or market-moving information relevant to contract outcomes. Therefore, financial institutions offering prediction-market products should use clear, standalone disclosures, customer knowledge assessments, product-specific acknowledgments, and transaction-level warnings to confirm that customers understand the products are event-contingent, speculative, not deposits, not FDIC-insured, and may result in the loss of the full amount paid.

Affiliated prediction market businesses can create conflicts involving order routing, market making, cross-selling, customer segmentation, use of customer data, and product design. Those risks should be addressed through governance committees, written policies, surveillance, restricted lists, employee trading controls, disclosure, independent compliance review, and board-level oversight.

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For organizations navigating the regulatory and operational challenges of prediction markets, EisnerAmper's Risk and Compliance Services team helps platforms design, assess, and strengthen the control environments they need to meet regulatory expectations and support long-term growth. Contact our team to learn more.