Prohibited and Unlawful Trading Activity

Anyone claiming insider trading on prediction markets is legal is wrong: federal law, CFTC regulations, and Kalshi's CFTC-approved exchange rules prohibit insider trading and other types of illicit trading on prediction markets. Federal law and Kalshi's exchange rules explicitly prohibit insider trading and other types of fraudulent trading activity by exchange members.

While insider trading is traditionally associated with the trading of stocks or securities, the absence of a traditional security does not eliminate insider trading or fraud risk. Classic insider trading law may have developed around the trading of securities, but CFTC regulators and federal prosecutors have other tools to investigate and charge insider trading schemes, including ones on Designated Contract Markets (DCMs) like Kalshi.

CFTC regulations prohibit:

• Manipulative or fraudulent activity on exchange
• Misstatements or omission of material facts by users
• Anything that defrauds another user of an exchange
• Price manipulation

For years, the CFTC and Department of Justice have pursued enforcement actions against traders for insider trading on CFTC-regulated markets. The CFTC relies on multiple regulations and statutes to enforce prohibitions against the above-listed conduct. Penalties for violations of these provisions have included multi-million dollar fines and criminal enforcement, in some cases. When insider trading investigations by the SEC or CFTC uncover evidence suggesting criminal intent, typically, federal prosecutors will make use of the federal wire fraud statute, 18 U.S.C. § 1343, to criminally charge defendants. Mirroring Kalshi's prohibition on engaging in any practice that operates a fraud or deceit, the federal wire fraud statute prohibits schemes to defraud others of money. Charges of wire fraud are punishable by up to 20 years in prison, a $250,000 fine, and other penalties.

Kalshi's rules contain comprehensive prohibitions against fraudulent activity on the exchange. Further, Kalshi specifically prohibits insider trading by exchange members. Kalshi defines insider trading as trading by:

• Any person who has access or is in a position to access material non-public information before such information is made publicly available
• Any person who is an employee or affiliate of a source agency for any contract
• Any person who is a decision maker, direct or indirect, or has any influence, direct or indirect, on the outcome of the underlying event for any contract

Kalshi's exchange rules also specifically prohibit any trading activity that is fraudulent, abusive, manipulative, or deceptive, involves material misstatements or omissions, or involves any practice which operates as a fraud or deceit upon another person.

Whenever a person opens an account on Kalshi, we collect information from them as part of the Know-Your-Customer process. All accounts are required to submit information before they are able to place any trade on Kalshi. From the moment the user is onboarded, all their trading activity is linked to identifying information – so Kalshi is always aware who is trading on the platform. Read more about the CFTC's market monitoring requirements at 17 CFR 38.151-59.

As Kalshi users trade, the Kalshi Compliance team monitors internal surveillance systems that flag any suspicious activity. The scope of these metrics are sensitive, and consist of confidential information, but they generally relate to trading patterns, timing of trades, trade positions, market history, and other market standard trade surveillance details.

Kalshi also utilizes third party vendors, including IC360, to further bolster its surveillance capabilities. IC360 shares with Kalshi alerts triggered on other platforms that offer sports markets – so Kalshi is alerted to suspicious activity in markets that are live on other trading exchanges and platforms.

Kalshi deploys the full suite of these surveillance capabilities to monitor each and every market that is open for trading activity, in accordance with CFTC regulations and core principle requirements. You can read more about these requirements here. Whenever Kalshi surveillance systems flag activity, they alert the Compliance team, which monitors trading activity on the exchange 24/7. Any time the Compliance team cannot quickly determine that the flagged trades are false positives, we immediately freeze the customer account and begin an investigation.

Whenever a user takes a position on a contract, surveillance systems analyze it in real-time in conjunction with price movement, trading patterns, volume on the market, and public information.

Throughout any investigation into suspicious trading activity, the account associated with the flagged activity is locked – any funds they have on the platform remain frozen and unable to be withdrawn. During an investigation, the Kalshi Compliance and Legal Departments collaborate to examine trading activity, review evidence collected, and interview the subject of the investigation. Once the investigation concludes, the Kalshi Legal Department determines whether there is reasonable evidence that a rule violation has occurred.

If there is, Kalshi Legal sends a notice of charges to the user in question. The notice begins a disciplinary process that Kalshi imposes in accordance with CFTC regulatory requirements and rules outlined in detail in the Kalshi Rulebook. In response to the notice, a user may seek to either resolve the charges with settlement or pursue a hearing before Kalshi's Disciplinary Panel. In the event they do either, notices of settlement or disciplinary action are submitted to the CFTC and any other appropriate regulator. Kalshi also maintains regular contact with the CFTC and other law enforcement agencies to make informal referrals related to illicit activity where appropriate.