Kalshi built a team to crack down on insider trading, while its CEO struggles to define it on live TV

• Prediction markets like Kalshi and Polymarket have been dogged by concerns about insider trading.
• Kalshi announced a raft of measures to combat insider trading, including a new head of enforcement.
• On CNBC, Kalshi's CEO said some trading on little-known information was "totally fair game."

Prediction markets are booming. So are concerns that they're rife with insider trading.

The two biggest platforms have starkly different positions on the practice. Polymarket sees insider trading as a feature, not a bug.

"What's cool about Polymarket is that it creates this financial incentive for people to go and divulge the information to the market and the market to change," founder Shayne Coplan told 60 Minutes in November.

Kalshi has struck a different note. Last week, the company announced a series of measures aimed at cracking down on users trying to cash in on nonpublic information: an expert advisory committee; a new partnership with the trade-surveillance company Solidus Labs; and a new head of enforcement, the lawyer Robert DeNault.

"We have a lot of data on traders, users, that other prediction markets don't have," DeNault, who joined Kalshi in October, told Business Insider. The company said it has made referrals to authorities, and DeNault said it also has its own internal rulebook and disciplinary processes, which would roll out "in the near future."

"There's lots of activity that gets flagged," he said. "It could be fraud, it could be theft, it could be a person hacking into their neighbor's computer."

Defining what counts as insider trading on prediction markets can be difficult — even for Kalshi's own leadership.

On CNBC's Squawk Box on Tuesday, Kalshi CEO Tarek Mansour faced questions about whether a Bad Bunny backup dancer would be committing insider trading if they bet on what his opening song would be.

Mansour did not say yes, but insisted that the line between a permissible trade and an impermissible one was clear. "If that's the position that people are taking, which is essentially, 'This is nonmaterial, nonpublic information, it's OK to actually talk about which song is going to be played,' or 'it's OK to divulge a series of information beforehand,' then it's OK and it's totally fair game," Mansour said.

So far, little alleged misuse of Kalshi has become public. A student worker at the University of Tennessee was fired after a Kalshi surveillance tool flagged that the student had taken a position on a University of Tennessee football game in October, according to a report in the Knoxville News Sentinel, which cited public records. The student was accused of violating a National Collegiate Athletic Association rule, not misusing confidential information.

John Auerbach, a managing director at the investigations firm Nardello & Co., said prediction market operators shouldn't only be concerned about law enforcement peering over their shoulder. He said "it's not good business" to have a reputation as a place where insiders profit at the expense of other users.

Auerbach said US-based prediction markets are coming to terms with a simple reality: "You need to upgrade your controls."

Jay Clayton, the US Attorney for the Southern District of New York, said at the Securities Enforcement Forum on Thursday that he expects there to be prosecutions related to prediction markets, though he didn't say when.

He compared it to point-shaving in basketball, which formed the basis for criminal charges that the Justice Department unveiled last month. "That's a crime," he said. "Because it's a prediction market doesn't insulate you from fraud."

The Wall Street Journal reported earlier this month that Clayton's office closed an investigation last July into whether Polymarket had knowingly dealt with US traders, despite having committed in a 2022 deal with the CFTC to not serving them.

DeNault said prosecutors or the CFTC — which can bring a civil lawsuit, but can't criminally charge people — could take years to act. While the amount traded on US prediction markets has grown exponentially over the past year, the statutes of limitations on potential fraud charges are between five and ten years.

Prosecutors have traditionally tended "to like to use a lot of that time to build perfect cases," said DeNault "Some of the most high-profile recent activity in terms of sports trading integrity investigations, some of it dates back 5 years, 6 years, a long time."

Meanwhile, the markets keep growing. Kalshi said it recorded $1 billion in Super Bowl trading volume on Sunday — up 2,700% from last year.

More than $100 million was bet on what song Bad Bunny would open with.