Regulation & Risk Glossary

Anti-Money Laundering

Anti-Money Laundering (AML) refers to the legal framework and compliance practices that prediction market platforms must implement to detect and prevent the use of trading activity to launder illicitly obtained funds. CFTC-regulated exchanges must establish AML programs under the Bank Secrecy Act, including customer identification, transaction monitoring, and suspicious activity reporting.

CFTC

The Commodity Futures Trading Commission (CFTC) is the independent US federal agency that regulates derivatives markets, including futures, swaps, and event contracts traded on prediction market exchanges. It grants Designated Contract Market status to exchanges like Kalshi and enforces anti-manipulation and anti-fraud rules.

Counterparty Risk

Counterparty risk is the possibility that the other party in a trade — or the platform facilitating it — fails to fulfill its obligation, leaving you unable to collect your winnings or recover your deposited funds. In prediction markets, this risk varies dramatically between regulated exchanges and unregulated offshore venues.

Custody

In prediction markets, custody refers to who holds the funds backing a trader's positions and under what legal and operational protections. On CFTC-regulated exchanges, a Derivatives Clearing Organization holds customer funds in segregated accounts; on decentralized platforms, smart contracts or crypto wallets hold assets directly.

Designated Contract Market

A Designated Contract Market (DCM) is a CFTC-licensed exchange authorized to list and facilitate trading in futures, options, and event contracts. DCMs must comply with 23 core principles covering market integrity, financial resources, participant protections, and regulatory reporting.

Geofencing

Geofencing is the practice of using a user's detected geographic location — via IP address, GPS data, or identity verification — to restrict access to prediction market trading in prohibited jurisdictions. Platforms use it to comply with US state gambling laws, international financial regulations, and OFAC sanctions requirements.

Liquidity Risk

Liquidity risk in prediction markets is the danger that a trader cannot enter or exit a position at a reasonable price because the market for that event contract is too thin. Wide bid-ask spreads, shallow order books, and the inability to sell before resolution are the main symptoms.

Self-Exclusion

Self-exclusion is a voluntary program that allows prediction market users to ban themselves from trading across one or more platforms, typically to address problem gambling concerns. Once enrolled, participating exchanges are required to block the user's account and reject new registrations for the duration of the exclusion period.