Don't Bet on Bankruptcy: Prediction Markets and the Limits of Insolvency Law

Prediction markets have become multibillion-dollar platforms for putting a price on uncertainty in politics, sports, finance, and even war. States and the federal government are fighting to establish regulatory authority over them. But what happens if one becomes insolvent?

Prediction markets depend on contingent event contracts whose value may turn on disputed facts, manipulable information, and uncertain legal status. A court confronting a failed prediction market may therefore need to resolve not only what law applies, but also what happened, before it can value the estate at all. At the same time, prediction markets strain ordinary bankruptcy doctrine governing the debtor, claim classification and priority, executory contracts, and dispute settlement.

 This uncertainty extends beyond doctrine to whether ordinary bankruptcy rules apply at all. If event contracts are derivatives—as the federal government argues—the Bankruptcy Code’s financial contract safe harbors may switch off some of bankruptcy’s central protections. If state efforts to outlaw many event contracts succeed, bankruptcy itself may be unavailable.

These issues shed light on broader debates in bankruptcy theory. They challenge the growing reliance on market prices as evidence of value and cast doubt on whether specialized resolution regimes designed for financial institutions translate to claims whose factual and legal predicates remain unsettled. To keep bankruptcy judges from making consequential policy decisions during a freefall bankruptcy, this Article advocates for an insolvency-aware framework that regulates event contracts based on their economic function.