The pushback against prediction markets is now underway

Prediction Markets Face Scrutiny Amid Concerns Over Insider Trading

This article was first published in Quartz’s Washington newsletter.

While war is far from a game, prediction markets are enabling people to wager and potentially profit from international conflicts as though they were sporting events.

Platforms such as Kalshi and Polymarket have seen a surge in users over the past year, fueled by aggressive marketing and a relaxed regulatory stance during the Trump administration. Americans are now betting on a wide range of topics, including weather, sports, and even the duration of White House press briefings. In 2023 alone, Kalshi’s trading volume hit $24 billion.

The trend recently expanded to bets on whether Iran’s supreme leader, Ayatollah Ali Khamenei, would lose power by March. As the U.S. deployed troops and equipment to the Middle East, Kalshi introduced a contract allowing users to speculate on Khamenei’s fate, with payouts fluctuating according to perceived likelihood. This market grew to $54 million, and Polymarket offered a similar contract.

These developments have sparked concern among Democratic lawmakers and experts, who warn of potential insider trading by individuals with access to confidential information prior to U.S.-Israeli military actions against Iran. Blockchain analytics firm Bubblemaps identified six suspected insiders who collectively earned $1.2 million on Polymarket by placing bets just hours before the initial strikes.

One prominent Democratic senator quickly pledged to introduce legislation to regulate prediction markets as soon as possible.

Senator Chris Murphy of Connecticut expressed his outrage on social media, calling the legality of such trading “insane.” By Wednesday, he clarified his intention to prohibit prediction market bets related to government actions.

Murphy warned that individuals with privileged access might have been incentivizing military action for personal gain, describing the situation as “dystopian.”

He told Quartz that he is collaborating with Republican colleagues in the Senate to build bipartisan support for the proposed legislation, aiming to introduce it within the month.

Other suspicious trades have also drawn attention. Representative Mike Levin of California highlighted a Polymarket user named “Magamyman,” who reportedly made $515,000 in a single day by placing a bet 71 minutes before news of the military operation broke.

Experts are increasingly troubled by the prospect of state secrets being exploited for financial gain.

Amanda Fischer, a former SEC staffer and current policy director at Better Markets, told Quartz, “The floodgates are open. This sector is still in its infancy, and Kalshi is constantly rolling out new products.”

White House Responds to Insider Trading Allegations

The White House dismissed concerns about insider trading, with spokesperson Davis Ingle stating, “The only special interest influencing the Trump Administration’s decisions is the well-being of the American people.”

Financialization of Everyday Events

Kalshi’s approach to the Khamenei market drew criticism from users. Federal law prohibits the company from offering bets that would be resolved by an assassination. In response, Kalshi has refunded fees related to the wager and defended its handling of the situation.

On Wednesday, Polymarket removed a market that let users bet on the chance of a nuclear explosion, after facing backlash for enabling profit from deadly events.

This illustrates the rapidly evolving landscape of prediction markets, where each new contract expands the boundaries of what can be wagered. Kalshi co-founder Tarek Mansour has articulated a vision of creating a financial system where any disagreement can be turned into a tradable asset at the click of a button.

“Our long-term goal is to turn every difference of opinion into a financial instrument,” Mansour said last year at a Citadel Securities conference. Kalshi was valued at $11 billion as of December.

Polymarket, valued at $9 billion, is also highly popular. However, since it operates using cryptocurrencies, it is technically off-limits to U.S. residents—though many Americans access it via VPNs. Most bets on both Kalshi and Polymarket focus on sports.

The Evolution and Regulation of Prediction Markets

Prediction markets have their roots in academia, not finance. The Iowa Electronic Markets, launched in 1988, allowed limited trading on political outcomes. In the following decade, Ireland-based Intrade gained widespread attention by offering contracts on political events, awards, and more.

U.S. regulators eventually forced Intrade to shut down in 2013, citing illegal gambling operations.

The Commodity Futures Trading Commission (CFTC) oversees prediction markets, but the agency’s capacity has diminished under the Trump administration. Fischer noted that the CFTC’s Chicago office recently lost its last enforcement attorney, down from a team of 20.

“The CFTC lacks the resources and expertise to effectively monitor these markets,” Fischer said. “They simply don’t have the staff to review the thousands of contracts offered by prediction platforms or to ensure adequate safeguards against insider trading.”

Both Kalshi and Polymarket have faced numerous lawsuits from state regulators—Kalshi alone is dealing with at least 20 cases. The main argument is that these companies are running gambling operations that should be subject to stricter oversight and reporting requirements.

The Trump administration has attempted to preempt legal challenges by asserting federal authority to set industry standards. Last month, the CFTC rescinded a Biden-era proposal that would have banned bets on sports and politics. CFTC chair Michael Selig has since stated that the agency will develop new regulations for the industry.

Growing Bipartisan Pushback

Opposition is mounting from both sides of the political spectrum. Mick Mulvaney, former chief of staff to President Trump, recently launched an advocacy group called “Gambling Is Not Investing,” which aims to apply state and tribal gambling regulations to platforms like Kalshi and Polymarket.

Alex Jacquez, policy director at the progressive Groundwork Collaborative and a former Biden White House adviser, told Quartz that even conservative policy experts are now interested in establishing guardrails for prediction markets. He warned that if left unchecked, these platforms could turn every aspect of daily life into a series of microtransactions.

“If this continues, we’ll see Kalshi odds attached to every moment, and society could devolve into a constant stream of microevents being settled or not,” Jacquez said. “It’s a rather dystopian prospect.”