NEW YORK, Aug. 9 -- Caleb Davies sent the warning before the market closed. He had watched the streams surge in real time, run the numbers, and messaged Kalshi's chief executive directly: hold off on settling until the data can be verified. Days later, his $4,500 in contracts had been settled against him. He had not heard back from the company.

What happened next defines the most consequential gap in prediction market regulation. Kalshi's head of enforcement and legal counsel, Robert DeNault, told Davies that "only Spotify can verify" whether the streaming data underlying the June chart market reflected genuine listening. Within minutes of that response, the exchange settled $3.32 million in contracts, paying out winners based on data Sp...