a16z proposes on-chain KYC and CFTC oversight to fix prediction market insider trading

Andreessen Horowitz’s (a16z) crypto arm submitted a comment letter to the CFTC on Wednesday, urging the agency to build a regulatory framework for prediction markets that addresses insider trading. 

The latter came as the U.S. Congress has also been putting pressure on the prediction market industry over suspicious trades tied to classified information.

What does a16z want the CFTC to do? 

In a recent comment letter authored by a16z crypto’s Miles Jennings, Scott Walker, David Sverdlov, and Aiden Slavin, a16z argued that the CFTC needs to establish a uniform federal framework to prevent conflicting state laws. 

The a16z letter responds to the CFTC’s Advance Notice of Proposed Rulemaking that was issued earlier this year under Chairman Selig. It argues that prediction markets are a natural extension of how information is collected in traditional markets, meaning that their potential goes beyond the current applications. 

Prediction markets are uncertain by design, so there will always be disagreements about whether an event really happened or not. a16z says the CFTC needs clear rules to settle those fights.

They recommend using blockchain’s auditable nature for real-time monitoring and implementing KYC checks to create “prohibited trader lists.” 

Kalshi’s weekly volume surged from $300 million to $3 billion, prompting the firm to argue that clear rules are needed before AI agents begin trading autonomously on these markets.

a16z argues that Congress already set up one federal system for other markets, and so prediction markets should get the same treatment.

a16z also clarified its position on “forbidden markets,” stating that the CFTC should permit event contracts on controversial topics, as long as the platform can show how it serves a legitimate public interest.

Kalshi landed in hot water and had to cancel its market on the Iranian regime change that was ultimately settled when Supreme Leader Ali Khamenei was killed. 

a16z agrees with Congress on stopping insider trading 

a16z’s letter coincides with Washington’s crackdown on insider trading on prediction platforms. On Thursday, the U.S. Senate banned lawmakers and their staff from using platforms like Polymarket and Kalshi. 

The legislation was passed just one week after a U.S. special forces soldier was charged with using classified information to bet on the capture of Venezuela’s former president, Nicolas Maduro. 

Cryptopolitan reported that similar concerns arose when traders placed uniquely timed bets ahead of U.S. strikes on Iran, prompting Senator Elizabeth Warren to call for an investigation.

In another case, Senator John Fetterman (D-Pa.) purchased Micron Technology (NASDAQ: MU) stock on March 30, catching the “exact bottom” before it surged over 60%. Fetterman’s committee oversees the CHIPS Act funding, which recently awarded Micron $6.1 billion.

Kalshi also recently suspended a U.S. Senate candidate and two House candidates for betting on their chances during the elections. Kalshi also previously suspended a MrBeast video editor for trading on privileged information and fined a candidate running for governor in California for betting on his own race. 

Polymarket recently updated its rules to prohibit insider trading. The platform also banned elected officials and government insiders from betting on events they can influence. Violators will either face wallet bans, fines, and they can even be reported to law enforcement.