Why Kalshi ended its trader incentive program following wash trading allegations

Kalshi announced the termination of its liquidity incentive program in response to mounting concerns about wash trading activity on the platform. The announcement came after the platform had achieved record monthly volumes of approximately $52.98 billion in September. The incentive program, which rewarded traders with additional funds or trading credits, became a focal point of scrutiny when critics and industry observers questioned whether rewards were encouraging traders to artificially inflate volumes through self-dealing or coordinated trades that had no genuine market purpose.

The decision to end the program represents a significant step backward from a growth strategy that had been designed to attract and retain active traders. For a derivatives platform, removing incentives can mean a decline in activity unless organic trading demand remains strong enough to sustain volumes on its own merit.

Wash trading occurs when a trader or a coordinated group of traders simultaneously buys and sells the same asset, or uses multiple accounts to create the appearance of genuine market activity. On a derivatives platform like Kalshi, which offers prediction markets and options, wash trading is particularly tempting because incentive programs often reward based on trading volume or transaction count rather than net profit or genuine market impact.

If a liquidity incentive program pays traders based on total notional value traded, a trader can generate rewards by repeatedly buying and selling the same contract to themselves across different accounts, creating false impressions of market depth and activity. The platform records the activity as legitimate volume, the trader collects the reward, and the apparent liquidity evaporates the moment incentives are removed or scrutinized.

On centralized exchanges, this problem is exacerbated because the exchange controls both the matching engine and the ledger, making it difficult for external observers to immediately detect coordinated or circular trades. Regulators and auditors typically uncover wash trading months after the fact, when patterns in trade execution timing, account ownership, and settlement become visible.

The U.S. Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have both issued guidance stating that wash trading is illegal market manipulation, regardless of whether it occurs on traditional exchanges or crypto platforms. The illegality stems from securities and commodities law, not from exchange policy alone.

For platforms like Kalshi, which operates in a regulatory gray zone offering derivatives to retail users, wash trading allegations create reputational and legal liability. A platform known for inflated volumes due to wash trading faces pressure from regulators, institutional partners, and sophisticated traders who view the data as unreliable. Institutional market makers, who provide genuine liquidity, may withdraw if they believe most activity is artificial.

Kalshi's decision to end the incentive program is a form of de-risking: by removing the mechanism that most easily enabled wash trading, the platform signals to regulators that it prioritizes market integrity over short-term volume metrics. However, this does not necessarily mean wash trading allegations have been fully resolved or that an investigation has concluded.

Derivatives platforms face a difficult choice when designing incentive structures. Rewarding volume attracts traders and creates the appearance of a liquid market, which in turn attracts more genuine participants. However, volume-based rewards are the easiest incentive structure to game through wash trading.

Alternative models exist: paying traders based on genuine taker volume, rewarding only profitable trades, or using market-impact metrics rather than raw transaction counts. Yet these models are harder to implement, more expensive to monitor, and often result in fewer rewards distributed overall. A platform that adopts strict criteria will attract fewer of the marginal traders who generate most of the wash trades, but it also generates less total volume and may appear less liquid than competitors.

Kalshi's decision suggests that the platform's leadership judged that the regulatory and reputational costs of defending an incentive program exceeded the revenue and user-growth benefits. This calculus may shift if competitors maintain their incentive programs and capture market share, or if regulators provide clearer guidance on acceptable incentive structures.

For retail traders using Kalshi, the removal of incentives reduces the effective rebates or bonuses they receive. However, it also means they are trading on a platform explicitly designed to eliminate an obvious vector for manipulation. Market data from Kalshi should become more reliable for the purposes of price discovery and risk management.

For institutional traders and market makers, the move is a signal that Kalshi is willing to prioritize trust over short-term metrics. This may encourage re-entry by firms that had previously avoided the platform due to data-integrity concerns.

For competitors, the question is whether they will follow suit or continue offering incentive programs. Platforms that maintain generous incentive structures will attract traders seeking rewards, but they also increase their own regulatory exposure if wash trading persists on their systems.

According to guidance from the CFTC and SEC, wash trading investigations typically focus on trade-execution patterns, account-ownership networks, and settlement flows, which can take months or years to fully uncover. A platform announcing the end of an incentive program does not necessarily mean a regulator has concluded an investigation or that enforcement action is imminent; it may simply reflect the platform's own internal risk assessment.

Tor Project documentation on onion services and privacy tools notes that derivatives platforms sometimes operate under pseudonymous accounts, which can complicate investigations but also means that wash trading across accounts is technically difficult to prevent without additional identity verification. This trade-off between user privacy and market surveillance is one reason why onion-based trading platforms have historically faced stricter scrutiny.

Court records from previous CFTC enforcement actions against crypto exchanges show that wash trading cases often turn on expert testimony analyzing historical trade data, not on admissions from traders or platforms. The legal standard is whether the trader knew or should have known that the trade was artificial and lacked genuine economic purpose.

For ordinary traders, the takeaway is that platforms with high reported volumes are not necessarily more liquid in practice; they may contain a large proportion of wash trades or other forms of artificial activity. Checking a platform's regulatory status, ownership structure, and compliance history is at least as important as looking at volume metrics alone.

If you are considering using a derivatives platform, verify that the platform is registered with or compliant with the relevant U.S. regulators (the CFTC for futures and derivatives, the SEC for securities). Look for public documentation of the platform's trade-surveillance systems and wash-trading policies. Platforms that are transparent about how they detect and prevent manipulation are generally safer to use.

For platforms themselves, the model that appears to be gaining favor is a combination of lower or no volume-based incentives, stricter account-verification requirements (KYC), and real-time trade-surveillance technology. This approach is more expensive to operate but creates a more defensible regulatory posture.

If you have experienced losses on a platform due to suspected market manipulation, report the issue to the relevant regulator (the CFTC has a whistleblower program) and consult a lawyer specializing in securities or commodities law. Crypto markets are increasingly subject to traditional financial regulation, and platforms cannot indefinitely ignore legal standards for market conduct.

Source: The Block