Three major questions under the explosive popularity of prediction markets: insider trading, Compliance, lack of Chinese narrative market.

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Author: Zhou, ChainCatcher

The prediction market continues to thrive in 2025, with Kalshi and Polymarket achieving a combined trading volume of $1.44 billion in September, setting a historical record. Recently, both platforms announced the completion of a new round of funding: Polymarket raised $2 billion from its parent company, the NYSE (ICE), bringing its valuation to $9 billion; Kalshi raised $300 million at a $5 billion valuation.

However, while the prediction market sector continues to thrive, three major questions have emerged on social media regarding this market: Will this market breed a large amount of insider trading? What is the regulatory stance of major national governments towards prediction markets? Why is there a general lack of Chinese narrative-type prediction events? This article discusses these questions.

Insider trading harvesting retail investors?

The magic of profit through cognitive means lies in predicting the market. However, due to the nature of predicting events, certain types of prediction market trading can easily slide into insider trading, especially regarding information that is publicly known among a small group before the announcement of event results, such as award winners and economic data.

On October 10, 2025, the day the Nobel Peace Prize was announced, a globally watched controversy over “insider trading” unfolded.

In July, Polymarket opened a market for “2025 Nobel Peace Prize Winner” with a total trading volume exceeding $21.4 million. Popular candidates include Yulia Navalnaya, the widow of Russian opposition leader Alexei Navalny, former U.S. President Donald Trump (for his controversial role in mediating the Hamas-Israel ceasefire), as well as environmental activist Greta Thunberg and WikiLeaks founder Julian Assange.

Maria Corina Machado had previously odds of only 3-5%, and was almost not favored. About 11 hours before the results were announced, Machado's odds suddenly surged from 3.6% to over 70%, with a significant increase in trading volume, and total bets exceeding $210,000. Among them, at least three accounts placed large bets on Machado to win, ultimately profiting around $90,000.

This incident directly sparked a major debate about insider trading.

One party believes that allowing insider trading can increase market accuracy to 92% because it accelerates information aggregation. Robin Hanson, an economist at George Mason University and one of the earliest advocates of prediction markets, has stated that allowing insiders to trade can improve the accuracy of odds. If the goal of prediction markets is to obtain accurate information, then you certainly want to allow insider trading.

The other party emphasized that this is a clear case of insider information leakage and fraudulent behavior, which will undoubtedly dampen the enthusiasm of ordinary investors to participate.

This has also sparked discussions related to regulation. A Forbes employee stated that the model of prediction markets lies somewhere between futures exchanges and gambling sites, and regulators treat them more like the latter. The insider trading laws enforced by the U.S. Securities and Exchange Commission (SEC) do not apply to prediction markets; they are contracts regulated by the Commodity Futures Trading Commission (CFTC). KPMG's 2025 report warned that betting on event contracts using significant non-public information could severely distort market integrity and easily lead to a chain collapse in a regulatory vacuum.

In prediction markets, internal stakeholders, experts deeply researched in the field, and speculative retail investors have completely different amounts of information, and the asymmetry of information has already determined who the winner is.

What is the regulatory attitude of major countries/regions towards prediction markets?

The second major potential issue with prediction markets is their ambiguous legal status around the world. They possess characteristics of both gambling and financial derivatives, often falling into a gray area in different jurisdictions, and may even face direct restrictions, which presents certain regulatory risks.

Currently, the countries that explicitly mention and regulate prediction markets are represented by the United States. The Commodity Futures Trading Commission (CFTC) classifies them as event contracts, requiring platforms to register as designated contract markets and strictly comply with the Commodity Exchange Act. In February 2025, the CFTC held a roundtable to discuss the regulatory framework for sports and event contracts, aiming to find a balance between innovation and retail customer protection. In May 2025, the CFTC dropped its appeal against Kalshi's political contracts, confirming their legality but adding requirements for transparent disclosure and anti-manipulation. Under CFTC regulation, Kalshi obtained compliance licenses across all 50 states, while Polymarket transformed into a regulated entity by acquiring the Florida derivatives exchange QCX, gradually expanding into the U.S. market.

The attitude in Europe is more cautious. The European Securities and Markets Authority (ESMA) mentioned prediction markets in the 2025 Markets in Financial Instruments Directive II (MiFID II) rules, requiring investment firms to optimize their order execution policies. The Markets in Crypto-Assets Regulation (MiCA) further incorporates this into the licensing framework for crypto asset service providers, emphasizing anti-money laundering compliance, demonstrating a regulatory stance that is both open and cautious.

Crypto KOL @Phyrex_Ni pointed out that prediction markets are structurally very similar to binary options. Traditionally, binary options are a type of derivative contract where investors make a judgment on a certain underlying asset or event. If their prediction is correct, they receive predetermined profits; if their prediction is wrong, they lose the amount invested. The mechanism of prediction markets is also similar.

Currently, in most countries where the regulatory status of prediction markets is unclear, they are often equated with binary options, and the general attitude is quite conservative. For example, the UK's Financial Conduct Authority (FCA) directly prohibits retail trading of binary options; the European Securities and Markets Authority (ESMA) bans marketing related to binary options; and many countries in Asia even directly regard them as gambling, which is one of the reasons why prediction markets have not yet “taken off” in Chinese-speaking regions.

Overall, regulatory fragmentation has exacerbated the risks of prediction markets, with most countries or regions focusing on anti-money laundering and consumer protection, either directly prohibiting such derivative contracts or imposing strict entry licenses.

Why is there a lack of a Chinese-speaking narrative market?

Overseas, Polymarket has transformed from a trading product into an informational social game, where users bet on events not just for profit, but also for a sense of participation, expression of rights and positions, and even to “bet on the future” with their positions.

The crypto KOL @MrRyanChi joked, “American college students have already started playing with kalshi and Polymarket, yet there are hardly any people in the Chinese-speaking regions discussing prediction markets.”

The current prediction market lacks a narrative market in the Chinese-speaking region. Apart from regulatory issues, crypto KOL @hoidya_ pointed out that the root cause is severely insufficient liquidity.

The core reason for insufficient liquidity is that market makers and dealers find it difficult to calculate this profit and loss. In traditional perpetual futures markets, the expected return (EV) for retail investors is negative in the long term.

Market makers leverage their statistical advantages to generate profits through hedging and funding rate arbitrage, thereby creating a reliable source of liquidity. For narratives in the Chinese language, market makers dominated by Europe and the United States may lack sufficient statistical, resource advantages, and cultural background. They themselves cannot determine whether they can achieve positive expected returns in the long run. Once the win rate cannot be quantified, they cannot allocate risk exposure, which is why they will not actively enter the market to inject liquidity.

KOL @Ru7Longcrypto pointed out that the Chinese community is still viewing prediction markets through the lens of DeFi, focusing on TVL pools and odds mechanisms, completely missing the point. She emphasized that the key to breaking out of the circle lies in creating content, not in creating pools.

However, the regulatory environment in the Chinese-speaking region is strict, and the selection of public event topics is limited. In particular, mainland China, Hong Kong, Singapore, and other places view political and electoral topics as sensitive issues, subject to strict legal constraints. In contrast, in Europe and the United States, such as the U.S. elections, these topics are legally recognized under the Commodity Futures Trading Commission (CFTC) framework, allowing for a broader space for platform topics.

Therefore, another key point in promoting the mainstream adoption of prediction markets in the Chinese-speaking world is to build a localized life question bank. For example, cz's mention market, predictions on the winner of the takeout battle, pricing of Xiaomi's new car, the number of travelers during the Spring Festival travel rush, purchase restriction policies, box office of the Ne Zha movie, etc. These events are not only more popular in the Chinese-speaking region, but they also have clear winning criteria, making them more likely to attract the interest and participation of Chinese investors.

With the rapid rise in popularity of this sector, many users are focusing on BNB CHAIN, where there is a dense population of Chinese users and a more mature Asian content ecosystem. He Yi has also publicly expressed welcome for professional teams to launch prediction products on the BNB chain, and YZi Labs is willing to support. Recently, the marketing momentum of several Chinese-led prediction market projects based on BNB Chain on Twitter has also noticeably increased.

Conclusion

Overall, it seems that this wave of interest in prediction markets may not be a bubble, but the fire has spread too quickly, and the market needs some calm voices and reflections. Although prediction markets have become mainstream, there are still controversies surrounding compliance and insider trading. The Chinese-speaking region particularly lacks localized narratives and urgently needs to address liquidity issues, as well as explore content more suitable for the Chinese community.

For ordinary investors, predicting the market is indeed a brand new way to play, with vast imaginative space and narrative appeal. Therefore, retail investors should focus more on areas of content they are familiar with, rather than simply placing bets like in “gambling.”

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