Regulatory Risks in Speculative Prediction Markets: Emerging Market Oversight and Investor Protection

In 2025, speculative prediction markets are no longer niche curiosities. Platforms like Kalshi and Polymarket have demonstrated their utility as tools for price discovery, risk management, and even political forecasting. Yet, as these markets expand globally, they face a critical challenge: regulatory uncertainty. While the U.S. Commodity Futures Trading Commission (CFTC) has taken steps to legitimize prediction markets under federal oversight, emerging economies remain fragmented in their approaches, creating significant risks for investors and innovators alike.

The U.S. Model: Innovation with Guardrails

The U.S. has emerged as a bellwether for prediction market regulation. The CFTC's 2025 roundtable on prediction markets signals a shift toward a "common-sense" framework that balances innovation with investor protection, according to the CFTC's 2025 roundtable. Platforms like Kalshi, operating under CFTC jurisdiction, now offer event contracts tied to measurable outcomes-elections, economic data, and even weather events-while adhering to structured rules akin to derivatives trading, as discussed in a HodlFM analysis. This approach has attracted institutional interest, with hedge funds and academic researchers leveraging prediction markets for insights.

However, the U.S. model is not without controversy. Outgoing CFTC Commissioner Kristin Johnson has warned that the lack of "guardrails" in prediction markets exposes retail investors to manipulation, fraud, and addictive behavior, in a Covers interview. Her concerns highlight a broader tension: while the CFTC aims to foster innovation, it must also address risks like market integrity and responsible gaming.

Emerging Markets: A Patchwork of Uncertainty

In contrast to the U.S., emerging economies lack cohesive regulatory frameworks for prediction markets. India, for instance, remains in a legal gray area, where platforms like Better Opinions and Probo self-classify as "skill-based" to avoid India's anti-gambling laws, according to an ESYA Centre analysis. This ambiguity has led to inconsistent enforcement, with some platforms operating openly while others face legal challenges. Similarly, Nigeria's recent Investments and Securities Act 2025 (ISA 2025) marks a step forward by recognizing virtual assets as securities under the Securities and Exchange Commission (SEC)'s purview, as explained in an Aluko & Oyebode summary. Yet, the act does not explicitly address prediction markets, leaving gaps in oversight for speculative instruments tied to events like commodity prices or political outcomes.

Brazil offers a contrasting example. While it has not yet formalized rules for prediction markets, its broader financial regulatory environment-led by the Comissão de Valores Mobiliários (CVM)-is evolving to align with global standards. The CVM's FÁCIL regime, which simplifies entry for smaller companies into capital markets, and its modernization of private equity fund rules, suggest a regulatory appetite for innovation, according to a Machado Meyer analysis. However, prediction markets would need to navigate Brazil's complex classification of financial instruments, potentially falling under derivatives or securities without clear investor protections tailored to speculative platforms.

Investor Protection: A Global Challenge

Investor protection in prediction markets is particularly acute in emerging economies. Nigeria's ISA 2025 introduces robust anti-money laundering (AML) and know-your-customer (KYC) protocols for digital assets, but these measures are not yet extended to event-based contracts, as noted in the Aluko & Oyebode summary. In India, the absence of a clear legal framework means investors lack recourse in cases of fraud or misrepresentation, as highlighted in the ESYA Centre analysis. Meanwhile, Brazil's CVM emphasizes transparency and proportionate oversight for traditional investment funds, but similar safeguards are absent for prediction markets, according to the Machado Meyer analysis.

The risks are compounded by systemic weaknesses in emerging markets. As noted in a 2025 Deloitte report, lax enforcement of insider trading laws, poor liquidity, and weak corporate governance structures in countries like Vietnam and Egypt undermine investor confidence, a trend discussed in an Investopedia overview. These challenges are magnified in prediction markets, where outcomes are often tied to volatile events like elections or commodity price swings.

The Path Forward: Balancing Innovation and Oversight

The U.S. experience suggests that regulatory clarity can drive growth. By treating prediction markets as derivatives, the CFTC has created a framework that attracts capital while mitigating risks through transparency and accountability, as noted in the HodlFM analysis. Emerging economies could adopt similar models, but they must also address unique challenges. For instance, Nigeria's ISA 2025 could be expanded to explicitly include event contracts under the SEC's mandate, while Brazil's CVM could explore regulatory sandboxes to test prediction market frameworks without stifling innovation, proposals reflected in the Aluko & Oyebode summary and the Machado Meyer analysis.

Technology may also play a role. Blockchain-based platforms and AI-driven compliance tools could enhance transparency and reduce fraud, as seen in Nigeria's Accelerated Regulatory Incubation Programme for virtual asset service providers (described in the Aluko & Oyebode summary). However, these solutions require collaboration between regulators and industry stakeholders to ensure they align with local legal and cultural contexts.

Conclusion

Speculative prediction markets are poised to reshape how we forecast and hedge against uncertainty. Yet, their success hinges on regulatory frameworks that protect investors without stifling innovation. The U.S. has taken a leading role, but emerging economies must now grapple with the dual challenge of fostering growth and safeguarding market integrity. For investors, the lesson is clear: in markets where oversight is still evolving, due diligence-and a healthy skepticism of unregulated platforms-is essential.