Burden of Prediction: New Regulations Planned for Prediction Markets

Due to recent scandals involving prediction markets, including one connected to Iran’s leader being ousted, Representatives Blake Moore of Utah and Salud Carbajal of California introduced a bill in the House of Representatives. If it passes, it will allow the Commodity Futures Trading Commission (CFTC) to prohibit event contracts related to war, terrorism, and other activities. Read on for details on the bill and issues with prediction markets.

Prediction Markets on Iran

The main reason for the introduction of this bill was a recent market on whether Iran’s supreme leader, Ali Khamenei, would be ousted. Following reports of his death, many participants began wondering how Kalshi would settle it. The market was listed without a death carveout. Kalshi claims this is because it’s different from an assassination market, and most markets can serve as proxies for war.

“We believe that’s different than having a market directly settling on someone’s death, which is not allowed for US regulated entities.”

Tarek Mansour, Kalshi CEO

However, the CEO would suspend the market and reimburse anyone who participated in it. While the market was being settled, many U.S. lawmakers became concerned about insider trading and the potential for classified information to leak. One U.S. senator even vowed to completely remove trading related to death, while others started preparing bills.

Regulating Prediction Markets

Representatives Blake Moore and Salud Carbajal worked to draft and introduce a bill to help prevent such markets from emerging. The Event Contract Enforcement Act aims to prohibit contracts based on assassination, terrorism, war, gaming, or other illegal activities. The list also includes election outcomes and government activity.

“Under-regulated prediction markets have exposed America to needless public safety and national security risks by allowing traders to invest in outcomes related to sensitive matters like terrorism, assassination, war, or elections.”

Blake Moore, Utah Representative

The bill also includes a clause regarding sports contracts. These have often been used to bypass sports betting restrictions in states that don’t allow sportsbooks, such as Utah. However, the bill will allow states to prohibit such markets if they are presented as sports betting, while any state that allows sports betting can opt out of enforcing this rule.

Kalshi Sues Utah

The sports betting clause is another chapter in the ongoing feud between Kalshi and Utah. In February, Kalshi filed a lawsuit against the state in the U.S. District Court because Utah’s strict anti-gambling laws were prohibiting the operation of prediction markets. While the CFTC supports prediction markets, Utah Governor Spencer Cox questioned their legality.

“Let me be clear, I will use every resource within my disposal … and under the Constitution of the United States to beat you in court.”

Spencer Cox, Utah Governor

Many other states are also attempting to curb the expansion of prediction markets, such as Michigan warning sportsbooks not to offer such contracts back in October. Meanwhile, the CFTC filed an amicus brief supporting Crypto.com in its lawsuit against Nevada. This is a strong departure from the Commission’s prior stance of preventing the growth of prediction markets.

Concerns About Insider Trading

Another reason states are enforcing stricter rules on prediction markets is insider trading. In January, a trader with no previous history invested over $34,000 only in markets predicting that the Venezuelan President Nicolas Maduro would be removed by January 31st. The account also predicted the U.S. would go to war with Venezuela, raising concerns that this account was held by someone with insider information.

There was also a market in February on how long President Trump’s State of the Union speech would last. The “over 100 minutes” option saw a significant spike in implied probability, rising from 42 to 73.55%. This happened at 5 pm ET, which was only five hours before the record was broken.

“Just insane that we don’t regulate rigged markets like this out of existence.”

Chris Murphy, Democratic Senator

Democratic Senator Chris Murphy expressed concern on his X account that markets like this are susceptible to corruption. Kalshi has also banned Kyle Langford, who traded on himself to win the California gubernatorial race. Even President Trump urged Congress to pass the Stop Insider Trading Act, which would stop lawmakers from buying publicly traded stocks.

Conclusion

Prediction markets are facing increasing scrutiny over concerns about insider trading and potential harm from political markets. Companies like Kalshi are facing lawsuits, and many states are working to curb further expansion. However, the bills restricting such markets haven’t passed yet, and companies like DraftKings are preparing their own prediction market products. As the future remains uncertain, we will keep you updated on any developments.