Prediction market compliance is not simply about adding KYC and an AML screening provider to a trading application. A prediction market development company must first determine how the product is legally classified in every target jurisdiction, because an event-contract platform can fall under derivatives, gambling, or other financial-market rules depending on its structure and the underlying event. In the United States, the CFTC describes event contracts as financial contracts that can be used to speculate on or hedge future events, while European and UK regulators have emphasized that some event contracts can also fall within gambling or financial-services regimes.
Why Prediction Market Licensing Is Different
The first compliance decision is what the platform actually operates as. A U.S. platform that lists event contracts as derivatives may need to operate through a CFTC-regulated designated contract market (DCM), while intermediaries handling customer trades may have separate registration obligations. The CFTC says DCM applicants must demonstrate compliance with 23 core principles, covering areas such as market integrity, access, surveillance, financial integrity, systems, and contract design.
This means licensing should be treated as an architectural requirement rather than a final legal checkbox.
Compliance question
Why it matters
Where are customers located?
Determines applicable jurisdiction
What events are traded?
Sports, politics, finance and other events can receive different treatment
Is the product a derivative or bet?
Determines the regulatory framework
Who operates the exchange?
May determine DCM or other licensing requirements
Who holds customer funds?
Can create additional financial obligations
Who clears transactions?
May require regulated clearing infrastructure
The CFTC also requires listed contracts to satisfy market-integrity requirements. Core Principle 3 requires contracts not to be readily susceptible to manipulation, while other requirements address position limits, financial integrity, surveillance, and abusive trading practices.
Choose the Jurisdictions Before Building the Platform
A prediction market should not be designed around one global compliance model. The regulatory treatment can change significantly depending on where users are located and what they are trading.
The United States provides one of the clearest examples. CFTC-regulated prediction markets operate within the derivatives framework, and the agency has recently issued guidance and proposed regulatory changes specifically addressing event contracts. The CFTC's current framework emphasizes contract integrity, surveillance, customer protection, and compliance with the Commodity Exchange Act.
The United Kingdom takes a different approach. The FCA states that prediction-market products linked to non-financial events such as sports or politics can fall under the Gambling Commission, while products referencing financial or certain climatic events may fall within the FCA's perimeter. The FCA currently considers relevant financial prediction-market products to be binary options and maintains a retail prohibition on those products.
In the European Union, ESMA has warned firms that event contracts may qualify as financial instruments depending on the question underlying the contract. Where they qualify as derivatives with binary outcomes, existing national measures concerning binary options can apply, including restrictions on retail distribution.
The practical takeaway: licensing analysis should happen before the product roadmap, not after development begins.
Build KYC Into Account Creation
KYC should be part of the platform's account architecture from the first registration screen. A regulated prediction market needs to establish who is trading, whether that customer is eligible in the relevant jurisdiction, and whether additional restrictions apply to the account or product.
For example, Robinhood requires customers to be approved for a Robinhood Derivatives account before they can trade event contracts. Eligibility considers factors including trading experience, investment profile, and state of residence.
A robust onboarding flow can therefore look like:
Registration → Identity Verification → Age/Eligibility Check → Jurisdiction Check → Sanctions Screening → Risk Assessment → Account Approval → Trading Access
The important point is that KYC should not end after registration. Customer information may need to be refreshed, accounts may require enhanced due diligence, and unusual activity should feed into transaction-monitoring workflows. The CFTC's proposed prediction-market framework specifically discusses whether customer-identification and account-monitoring systems can identify traders, link trading activity to individuals or entities, and distinguish people with privileged information about an event.
How AML Monitoring Should Work
AML compliance for a prediction market needs to focus on behavior, not just identity verification. A user can pass KYC successfully and still create risk through unusual deposits, rapid trading, coordinated activity, multiple accounts, suspicious withdrawals, or trading patterns that suggest manipulation or misuse of information.
For platforms handling financial transactions, the monitoring architecture should connect:
Customer Profile + Deposits + Trades + Withdrawals + IP/Device Data + Counterparty Activity → Risk Engine → Alert → Review → Escalation
FinCEN's casino guidance provides a useful illustration of why transaction patterns matter. For covered casinos, suspicious-activity reporting can apply when suspicious transactions or patterns involve $5,000 or more, including aggregated activity. FinCEN also highlights behaviors such as minimal wagering combined with significant financial activity and transactions structured to avoid reporting requirements.
However, prediction-market operators should not simply copy casino thresholds into their systems. The applicable AML obligations depend on the legal structure, regulated entities involved, payment model, and jurisdiction. The safer approach is to configure monitoring rules around the actual regulatory obligations of the business.
Add Sanctions and Geolocation Controls
Sanctions compliance becomes especially important when a prediction market operates across multiple countries or supports digital assets. A platform can technically accept a customer from anywhere on the internet, but that does not mean the customer is legally permitted to trade.
OFAC recommends risk-based sanctions programs that can include KYC procedures, sanctions screening, geolocation controls, and IP blocking. Its guidance for virtual-currency businesses specifically recommends using geolocation information to identify and prevent prohibited access from sanctioned jurisdictions.
For a prediction-market platform, this can be implemented through multiple signals rather than a single IP check:
Government-issued identity and residence
IP and geolocation information
Device fingerprinting
VPN and proxy detection
Payment-country information
Sanctions and watchlist screening
Account activity and login anomalies
This layered approach becomes particularly important when the platform supports both fiat and blockchain-based settlement.
Example: Robinhood's Multi-Exchange Prediction Market Model
Robinhood demonstrates how compliance and infrastructure can evolve together. Its prediction-market hub initially offered contracts through KalshiEX LLC, a CFTC-regulated exchange, while Robinhood Derivatives operates as a registered futures commission merchant and NFA member.
The platform has since expanded its infrastructure. Robinhood announced its Rothera joint venture with Susquehanna International Group and later began routing selected event contracts through Rothera, a CFTC-licensed exchange and clearinghouse. It subsequently added additional venues, illustrating how a prediction-market product can separate its customer interface from regulated exchange and clearing infrastructure.
This model is useful for companies that do not intend to become the entire regulated market infrastructure themselves.
Design Market Surveillance From Day One
Prediction-market compliance extends beyond KYC and AML. The platform also needs systems capable of identifying market manipulation, insider trading, abusive trading, suspicious coordination, and unusual order behavior.
The CFTC has specifically highlighted surveillance as a core requirement for regulated prediction markets. Its recent regulatory work also examines whether platforms can detect abnormal trading patterns, coordinated activity, insider-information risks, and other behavior inconsistent with orderly markets.
This means the trading engine should generate detailed audit data rather than storing only final transactions.
Important surveillance records include:
User ID → Order → Timestamp → Price → Quantity → IP/Device → Market → Cancellation → Execution → Settlement
Maintaining this chain makes investigations substantially easier when regulators, compliance teams, or internal investigators need to reconstruct trading activity.
Example: Novig's Move Into a Regulated Sports Prediction Market
Novig provides another example of how regulatory positioning can shape product development. The sports-focused prediction market received CFTC designation as a Designated Contract Market, enabling it to launch nationwide as a federally regulated sports prediction market. Its platform subsequently introduced Instant Live Trading and deeper liquidity as part of the nationwide product expansion.
Novig also entered a multi-year partnership with the New York Mets, becoming the team's exclusive official prediction-market partner. The agreement includes in-ballpark, broadcast, digital, and social activations, showing how a regulated prediction-market platform can combine financial-market infrastructure with sports-focused distribution.
For developers, the important lesson is that compliance cannot be separated from the product's trading model, market availability, partnerships, and customer acquisition strategy.
Build a Compliance-Ready Architecture
A scalable compliance architecture should separate the trading engine from the compliance engine while allowing them to exchange risk signals in real time.
Platform layer
Compliance responsibility
Identity
KYC, age and identity verification
Jurisdiction
Geolocation and eligibility
Screening
Sanctions and watchlists
Trading
Market and order surveillance
AML
Transaction monitoring and risk scoring
Payments
Deposit and withdrawal controls
Reporting
Audit trails and regulatory records
Security
Access control and data protection
Resolution
Transparent settlement evidence
The architecture should also support manual compliance review. Automated systems can flag suspicious activity, but high-risk cases may require human investigation, supporting documentation, account restrictions, or regulatory escalation.
Final Thoughts
Prediction market compliance begins with classification and licensing, then extends through KYC, AML, sanctions screening, geolocation, market surveillance, transaction monitoring, and transparent settlement. The regulatory treatment is not uniform: the same event contract can receive different treatment depending on its underlying event, jurisdiction, product structure, and whether it is considered a financial instrument or gambling product.
For a company building a prediction market, the most practical approach is to design compliance into the platform architecture from the beginning. Identity, eligibility, surveillance, AML monitoring, sanctions screening, audit logs, and reporting should operate alongside the trading engine rather than being added after launch. That approach makes the platform easier to scale across jurisdictions while reducing the risk of expensive architectural changes when regulatory requirements evolve.
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