The US is betting on AI to catch insider trading in prediction markets

The US Commodity Futures Trading Commission (CFTC) is increasing its efforts to detect and prosecute insider trading in prediction markets. This renewed focus comes after a period where such markets, particularly those operating offshore, appeared to be fertile ground for illicit trading activities. The CFTC is specifically targeting US-based traders who access these platforms via VPNs. Agency chairman Michael Selig has stated a clear intent to pursue and take action against these individuals.

The CFTC is expanding its workforce and investing in artificial intelligence to manage the growing volume of data and identify suspicious trading patterns. These AI tools help pinpoint potential areas for investigation and determine when to issue subpoenas. In addition to in-house surveillance systems, the agency employs third-party blockchain tracing tools like Chainalysis for crypto platforms and market abuse detection software like Nasdaq Smarts for centralized markets.

Prediction market companies are also engaging in efforts to detect illicit activities. Kalshi, a US-based exchange, has announced suspensions and penalties for customers involved in insider trading. Similarly, Polymarket, another prominent platform, has partnered with Chainalysis and Palantir to enhance its market integrity measures and crack down on manipulation, especially after facing backlash regarding suspected insider trading.

The CFTC's intensified scrutiny coincides with growing concerns from lawmakers about insider trading in prediction markets, particularly those related to geopolitical events and war-themed contracts. Senator Chris Murphy and several members of Congress have urged the CFTC to investigate these markets. The agency is actively pursuing numerous insider trading tips and expanding its surveillance globally, asserting extraterritorial jurisdiction where appropriate, particularly under the authority granted by the 2010 Dodd-Frank Act.

While the agency is just beginning its crackdown, a former US Army special forces soldier was recently arrested for insider trading on Polymarket. This arrest, which Polymarket claims it flagged to the government, signals the CFTC's resolve to hold wrongdoers accountable, regardless of their profile. Selig emphasizes that this is just the beginning of their enforcement actions.