Regulatory Risks of Prediction Markets: A Compliance Checklist for Firms Building Marketplaces

Why prediction markets are a compliance minefield — and why firms must act now

Prediction markets compliance is the fastest-growing legal headache for fintechs, banks and marketplaces in 2026. With major financial institutions — including Goldman Sachs — publicly exploring entry, and cloud providers offering sovereign infrastructure to solve data residency issues, firms face competing regulatory regimes for anti-money laundering, securities law, gambling law and data privacy. If you’re building a marketplace that prices future events, you must map regulatory risk before you launch or scale.

Quick takeaways

• Prediction markets can trigger AML/KYC, securities law, gambling and payments regulation simultaneously.
• U.S. and EU regulators tightened enforcement in late 2025 — expect more scrutiny in 2026.
• Banks and institutional entrants face additional prudential and reputational rules.
• This article gives a practical, prioritized compliance checklist you can implement now.

The 2026 regulatory landscape — what changed and what matters

The regulatory environment for prediction markets shifted materially in late 2025 and early 2026. Two developments frame risk for platform operators:

• Traditional financial institutions publicly exploring use cases: On Jan. 15, 2026, Goldman Sachs’ CEO David Solomon said prediction markets were "super interesting" as the firm evaluates how to participate. That signals mainstream institutional interest and, crucially, regulator attention toward platforms that may interact with regulated markets or institutional flows.
• Infrastructure vendors responding with sovereign-cloud options: AWS launched the AWS European Sovereign Cloud to meet EU sovereignty requirements (late 2025/early 2026). Data residency and legal assurances are now operational tools for compliance teams building cross-border marketplaces.

"Prediction markets are super interesting," — David Solomon, Goldman Sachs, Jan 2026 earnings call.

Those shifts matter. Institutional interest brings liquidity and governance expectations, but it also attracts regulators (banking, securities, prudential and consumer protection). Sovereign cloud options add a pragmatic way to meet European data rules but do not erase AML, payments or securities obligations.

Regulatory risk map: who can take action and on what grounds

Prediction marketplaces can fall under multiple regulator mandates simultaneously. Map these early:

• Financial crime/AML regulators (e.g., FinCEN in the U.S., FIUs across Europe): require anti-money laundering programs, suspicious activity reporting and sanctions screening.
• Securities regulators (e.g., SEC in the U.S., ESMA in the EU): claim jurisdiction when a product constitutes an investment contract, security, derivative or collective investment scheme.
• Derivatives/commodities regulators (e.g., CFTC in the U.S.): assert authority if contracts are swaps or derivatives referenced to commodities or economically equivalent to futures.
• Gambling regulators (national/state gaming commissions): regulate markets treated as wagering or betting on events (particularly political and sporting outcomes).
• Payments and money transmission regulators (state MTLs in the U.S., FCA in the UK): if holding or transmitting fiat or tokens for users, money-transmitter licensing may be required.
• Data protection authorities (e.g., ICO in the UK, EU DPAs): enforce GDPR-style privacy and cross-border transfer rules.
• Prudential and bank regulators (OCC, Fed, FDIC): when banks or insured institutions touch a marketplace, expect additional capital, outsourcing and vendor-management scrutiny.

AML & KYC: practical compliance controls for prediction marketplaces

AML is not optional. Prediction markets — especially those involving fiat or crypto transfers — are attractive to money launderers, sanction evaders and bad actors seeking to monetize information or manipulate outcomes. A robust, risk-based AML program is the foundation for lawful operation.

Minimum program elements

1. Designate an AML compliance officer with seniority and authority to implement controls and report upward.
2. Risk assessment: classify market types (political, sporting, financial), customer segments, jurisdictions and tokens/fiat rails to define inherent risk.
3. KYC tiering: implement multi-tiered identity proofing: low-risk (email + phone), medium-risk (ID verification, selfie biometrics), high-risk (enhanced due diligence, PEP/sanctions screening, source-of-funds).
4. Transaction monitoring: implement rules for outliers (large positions, rapid trading, anomalous settlement patterns) and integrate with behavioral analytics and machine-learning detectors.
5. Sanctions and PEP screening: apply real-time screening for sanctions lists, interdict transactions with blocked persons, and apply country-based restrictions (e.g., sanctioned jurisdictions).
6. SAR filing and recordkeeping: define escalation paths and retention policies (in line with local law — e.g., 5–10 years in many jurisdictions).
7. Ongoing training and independent audit: periodic reviews of AML program effectiveness and external audits where required.

Crypto-specific AML issues

On-chain markets complicate AML because participant wallets may be pseudonymous. Key mitigations:

• Use KYT (Know-Your-Transaction) providers to score wallet risk and trace funds.
• Block interactions with wallets linked to mixers, sanctioned addresses, or darknet marketplaces.
• Enforce withdrawal limits for non-KYCed wallets and require custodial onboarding for high-volume participants.
• Comply with evolving FATF guidance and local VASP requirements — ensure travel-rule implementation where mandated.

Securities law: when a prediction contract becomes a regulated security

One of the trickiest legal questions: is the prediction contract a security? If yes, then capital-markets rules apply — registration, disclosure, broker-dealer obligations and investor protections.

Key legal tests and considerations

• In the U.S., the Howey Test remains central: an investment contract exists when there’s an investment of money in a common enterprise with an expectation of profits from the efforts of others. Some prediction markets that pool capital and distribute payouts based on an operator-managed pool may cross this line.
• If contracts represent fractional interests in pooled capital, or if the platform markets itself as an investment product to profit-seeking participants, expect securities scrutiny.
• Derivative-like structures: CFTC may assert jurisdiction if instruments are economically similar to futures or swaps. Regulated trading platforms face registration and surveillance obligations.
• Retail protections: if selling to consumers, prospectus and disclosure norms (and suitability rules) may apply.

Practical mitigation strategies

• Structure markets as peer-to-peer contracts with transparent counterparty matching to reduce “common enterprise” arguments.
• Avoid pooling user funds in ways that create investment vehicles; prefer bilateral settlements or custody with licensed custodians.
• Obtain formal legal opinions early; consider working with regulators via sandbox programs.
• Consider limiting participation to accredited or professional investors where allowed, with robust verification.

Gambling, political-event bans and marketplace content controls

Many jurisdictions treat certain prediction markets as gambling. Political event markets are especially sensitive — several countries ban betting markets related to elections or political outcomes, and platforms enabling foreign interference can face criminal exposure.

Controls to implement

• Geo-fencing: block access in jurisdictions where activity is barred or where local law is ambiguous.
• Content rules: prohibit political or election-related markets where legal risk or reputational risk is high.
• Age verification and consumer-protection disclosures for wagering-style markets.

Marketplace licensing and payments: money transmission & bank partnerships

If your marketplace accepts fiat, moves funds or facilitates settlements, regulators will treat you as a payments intermediary. In the U.S., that often means state money-transmitter licenses (MTLs). For banks and large financial firms considering entry, expect more stringent due-diligence from prudential regulators and the need to demonstrate safe outsourcing, liquidity and capital plans.

Key licensing and payments actions

• Map money-transmission requirements across target jurisdictions; MTLs in the U.S. are state-by-state and often require bonding and audits.
• For crypto rails, register as a VASP or obtain equivalent licensing where required; integrate travel-rule compliance mechanisms for transfers.
• If partnering with a bank or broker-dealer, align contract terms on sanctions, fraud, capital hold, and incident response.
• Implement escrow and settlement models that limit the platform’s exposure as a custodian when possible.

Data protection and sovereign infrastructure

Privacy and data residency are no longer theoretical. GDPR enforcement and national security reviews require platforms to control where personal data is stored and who can access it. In 2026, cloud vendors offer sovereign regions to meet these needs — but operational controls are still necessary.

Practical steps

• Choose sovereign-cloud options for EU and other sensitive markets (e.g., AWS European Sovereign Cloud) to reduce cross-border transfer risk.
• Encrypt data at rest and in transit, with key custodianship aligned to local legal requirements.
• Implement least-privilege access controls, logging and tamper-evident audit trails to defend against regulatory inspection.
• Publish a transparent privacy notice with lawful bases for processing, retention periods and user rights mapping.

Banks entering prediction markets — extra scrutiny to expect

When a bank (or a large financial institution like Goldman Sachs) touches a prediction market, expect layered scrutiny: internal risk committees, supervisors focused on reputational risk, and prudential examiners focused on operational resilience and AML. Banks must treat such activity as potentially high-risk and document mitigations thoroughly.

Board-level and exam-ready actions for banks

• Prepare a clear risk appetite statement and scenario analyses for market abuse, AML, sanctions exposure and operational outages.
• Request legal and regulatory pre-clearance for product design, including trading mechanics and custody arrangements.
• Ensure vendor risk management (cloud, KYC providers, analytics) meets regulator expectations for third-party oversight.
• Maintain capital and liquidity buffers if the bank’s balance sheet intermediates positions or provides settlement services.

Operational controls & technology stack recommendations

Good technology reduces compliance burden — but it must be configured correctly. Key areas to prioritize:

• Identity verification: multi-layer verification with biometric liveness checks for higher tiers.
• Transaction monitoring: rules-based + ML anomaly detection, with human-in-the-loop review for flagged alerts.
• Wallet screening and KYT for crypto markets, with immutable audit logs for chain events.
• Escrow & settlement ledger: ensure atomic settlement where possible and maintain reconciliations with on/off chain records.
• Incident response: playbooks for sanctions hits, SAR filing, exchange notifications and user communications.

Regulatory engagement: how to get ahead of enforcement

Proactive engagement reduces enforcement risk and shortens time-to-market. Tactics that work in 2026:

• Use sandbox programs: several regulators expanded sandbox offerings in 2025–26 to pilot event-based markets with supervision.
• Obtain written no-action letters or pre-approval where possible, especially for novel tokenized structures.
• File voluntary disclosures and remediation plans if exposure is discovered; regulators prioritize cooperation.

Comprehensive compliance checklist: step‑by‑step

Use this prioritized checklist as a launch or audit roadmap. Each line item should be assigned an owner and a timeline.

1. Legal scoping memo: identify potential securities, derivatives, gambling, payments and AML triggers across target jurisdictions.
2. Regulatory outreach: request meetings with relevant regulators or join a sandbox within 60–90 days.
3. AML foundation: appoint AML officer, complete risk assessment, deploy KYC tiers and sanctions screening.
4. License map: list required MTLs, VASP registrations, or gambling licenses; start applications for priority jurisdictions.
5. Data plan: select sovereign-cloud hosting where necessary, design encryption and cross-border transfer strategy.
6. Operational controls: implement TM/KYT, trade surveillance, dispute resolution flows and custody rules.
7. Contractual protections: vendor SLAs, indemnities, bank partnership agreements, user T&Cs with risk disclosures.
8. Insurance & capital: obtain professional liability/Cyber/financial crime coverage and confirm capital requirements with banking partners.
9. Testing & audit: run red-team scenarios for market manipulation, laundering, sanctions evasion and resiliency outages.
10. Launch governance: set up board-level oversight, compliance KPIs and quarterly regulatory reporting.

Case studies & real-world signals

Two practical developments indicate where regulators and infrastructure are moving.

Institutional interest: Goldman Sachs (Jan 2026)

Goldman Sachs’ public interest in prediction markets means institutional capital could provide deep liquidity—but it also means product designs will be scrutinized for compliance parity with other traded instruments. Firms that want to partner with or compete against banks must be able to demonstrate capital controls, auditability and robust AML/KYC.

Sovereign-cloud infrastructure: AWS (early 2026)

AWS’s EU sovereign-cloud offering gives operators a practical technical control to satisfy European sovereignty and data-residency demands. Combine this with strong key management and logging to lower regulatory barrier-to-entry in EU member states.

Advanced strategies and future predictions (2026–2028)

Expect three trends to shape compliance strategies over the next 24 months:

• Convergence of crypto and traditional finance rules: regulators will apply existing prudential and AML frameworks to tokenized prediction markets, raising the bar for compliance tech and audits. See tokenized prediction markets analysis for parallels in other tokenized content markets.
• Cross-border coordination: international enforcement cooperation will increase, meaning a regulatory gap in one country is not a safe harbor for high-risk markets.
• RegTech codification: compliance-as-code and regulator-accessible audit logs will become standard, reducing onboarding friction with banks and exchanges.

Actionable next steps for engineering, legal and product teams

1. Run a 30‑day legal sprint to classify each market type against securities, gambling and payments tests.
2. Deploy a minimum viable AML stack (KYC provider + sanctions screening + basic TM rules) prior to any fiat/crypto onramps.
3. Choose sovereign-cloud regions for sensitive markets and formalize cross-border data-handling policies.
4. Engage with regulators and apply for sandbox trials in priority jurisdictions before public marketing.
5. Document board-level approvals, risk appetite and incident response — regulators want governance evidence.

Final thoughts

Prediction marketplaces are legal and commercial growth opportunities for fintechs and banks in 2026 — but they sit at a regulatory crossroads. The right compliance program is not a checkbox; it’s a product enabler that unlocks bank partnerships, institutional liquidity and cross-border expansion. Prioritize AML/KYC, clarify securities exposure, adopt sovereign-data strategies and engage regulators early. That combination turns regulatory risk into a competitive advantage.

Call to action

If you’re building a prediction marketplace or evaluating a bank partnership, start with our ready-to-use compliance checklist and legal scoping template. Contact themoney.cloud compliance team for a bespoke review — we’ll map jurisdictional obligations, help design AML/KYC tiers and prepare regulator-ready documentation so you can scale safely in 2026.

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