Why prediction markets are the fastest-growing grey zone in global finance

Earlier this year, an Israeli security investigation alleged that military personnel used a crypto-based prediction market while possessing classified information about planned operations. During questioning, one crewmember described widespread use of the platform across his unit, suggesting the practice extended beyond the individuals directly involved.

The case highlighted a challenge that goes far beyond one platform or one country. Prediction markets have expanded rapidly over the past three years, but their legal classification and regulatory oversight remain fragmented. They are not consistently treated as financial instruments, forecasting tools, or a separate product category. This regulatory gap is creating risks for consumers, markets, and national security.

Prediction markets have evolved from niche crypto products into a significant international industry. Election contracts accelerated public awareness during the 2024 US presidential race, when leading platforms processed billions of dollars in market activity tied to the outcome.

Sports, political, cryptocurrency, and geopolitical contracts have continued attracting users, with the sector's annual activity now measured in the tens of billions.

Institutional investors and established financial companies have also shown growing interest. Major financial infrastructure providers have invested in leading platforms, giving additional credibility to a sector that was considered experimental only a few years ago.

Some operators have pursued regulated access to the United States through acquisitions of licensed derivatives exchanges, while others continue serving international users through offshore structures.

The growth is clear. The rules governing the industry are not.

The world still cannot agree on what prediction markets actually represent.

Several countries, including France, Italy, Singapore, Spain, Switzerland, Poland, Romania, Australia, the Netherlands, and Brazil, have restricted or blocked leading platforms, viewing them as unauthorized speculative services under existing regulations.

In the United States, the Commodity Futures Trading Commission classifies prediction market contracts as derivatives and has allowed certain platforms to operate under regulatory oversight. The CFTC permits event-based contracts on many topics but restricts markets involving wars, terrorism, and assassinations.

Other operators have previously faced regulatory action for operating without authorization before later seeking compliance pathways.

However, offshore versions of major platforms continue operating outside direct CFTC jurisdiction. Much of the global activity flows through these entities. Users in countries that restrict access can often reach them through technical workarounds such as VPN services.

The unresolved question - whether prediction markets should be viewed as financial products, speculative platforms, or something entirely new - determines who regulates them, what protections apply, and how users themselves should be classified.

While regulators debate definitions, the platforms continue expanding.

How these services are presented to consumers further complicates the issue. Someone searching for the best online casino games would expect to encounter products with clear licensing information, age restrictions, and responsible-use guidelines. Prediction markets operate through a similar mechanism of committing money to uncertain outcomes, but they present themselves as trading, forecasting, or information discovery tools.

That distinction in presentation can influence which protections users expect and which authorities are assumed to be responsible.

Recent investigations in Israel and the United States have brought attention to the potential risks surrounding prediction markets.

According to an indictment filed in Tel Aviv District Court in February 2026, an Air Force reserve major attended a classified briefing two days before a major Israeli military operation. Despite signing a confidentiality declaration, he allegedly disclosed the planned timing of the operation to a civilian contact, who then used that information on a prediction platform. The two later repeated the method in connection with additional military operations.

Both individuals were indicted on charges including transferring secret information, bribery, aggravated espionage, and obstruction of justice. The IDF described the incident as a serious ethical failure and a clear breach of security boundaries.

The case was not isolated. In the United States, a soldier reportedly used a prediction market to take a position on the outcome of a military operation targeting a foreign leader shortly before the event became public. He was arrested in April 2026.

Separately, a technology-sector employee was accused of using confidential corporate information to predict the outcome of an internal company event through a similar platform.

Another incident highlighted how prediction markets can influence the very events they attempt to measure. An Israeli military correspondent reportedly received threats from users who had taken positions related to a possible Iranian missile attack and attempted to pressure him to change his reporting in order to affect the outcome of their positions.

These examples demonstrate risks that do not fit neatly within traditional regulatory frameworks. Prediction markets can create incentives to exploit nonpublic information, disclose sensitive material, or attempt to influence the events and information flows on which contracts are based.

The concern extends beyond classification. It involves market integrity, corporate confidentiality, and national security.

Regulatory approaches around the world are moving in different directions.

In the United States, authorities increasingly treat certain prediction market contracts as regulated derivatives. The current administration has signaled strong support for the sector by reducing federal scrutiny and encouraging commercial expansion.

Financial and media companies connected to prominent political figures are also exploring their own prediction market products, adding both commercial momentum and political complexity.

Europe has taken a different approach. In July 2026, the Netherlands rejected an appeal by a leading platform against restrictions, while Italy added the service back to its list of unauthorized operators.

The regulatory divide continues to widen even as the platforms themselves expand.

The underlying crypto infrastructure makes geographic restrictions difficult to enforce. Users in countries where prediction markets are limited can often access offshore platforms with relatively little technical effort.

The sector has already attracted significant activity around major political events, including the 2026 US midterm elections, long before voting takes place.

Israel sits at the center of this global debate: A country whose laws restrict certain forms of speculative digital activity, whose technology sector contributes to the infrastructure behind emerging platforms, and whose security environment has demonstrated why stronger oversight may be needed.

The regulatory gap is not closing. It is becoming more complex.

Prediction markets describe themselves as tools for understanding future events. Some regulators view them as unregulated financial activity. Security officials are increasingly examining the risks they may create.

The only clear conclusion is that the industry is growing faster than the rules designed to govern it.

This article was written in cooperation with Giorgi Jikia