Wanna bet? Washington steps up scrutiny of prediction markets

WASHINGTON (AP) — As the United States was preparing a daring mission to rescue an airman whose fighter jet was shot down by Iran, there was money to be made.

Users on Polymarket, the world’s largest prediction market, could place bets on when the airman would be rescued. When Rep. Seth Moulton, D-Mass., shared a screenshot of the activity on social media, an April 3 rescue was trading at 15% compared with 63% who were betting on April 4.

After Moulton posted the screenshot and blasted this “dystopian death market,” Polymarket stopped the betting, saying the market “does not meet our integrity standards.”

A former Marine who served four tours in Iraq, Moulton said he was “absolutely not satisfied with Polymarket’s response” and blamed the site for being “completely unwilling to self-regulate when it comes to betting on the lives of our service members.”

“This is war profiteering and Congress needs to step in and stop it,” he said.

A confrontation is brewing in Washington over prediction markets, the online exchanges that allow users to bet on the outcome of everything from a baseball game to when Jesus Christ will return.

In a highly polarized Congress, the need to guard against the prediction markets being used for insider trading has become rare common ground. Members of both parties pressed the leader of a typically low-profile regulatory agency on the issue during a hearing on Thursday. The market debate is also drawing in the White House, potential presidential candidates and state leaders.

“It’s a national conversation about what it means to have market integrity,” said Kristin Johnson, a former commissioner at the Commodity Futures Trading Commission, which regulates prediction markets in the U.S.

In a capital that was slow to respond to the perils of tobacco, opioids and social media, the push to put guardrails on prediction markets has been uncommonly swift.

The markets, which include Polymarket and its chief rival Kalshi, have been criticized for everything from undermining the integrity of sports to contributing to an online betting addiction crisis among young men. Polymarket has come under particular scrutiny as a venue for offshore trades that are beyond the reach of U.S. regulators.

Donald Trump Jr., the president’s son, is on Polymarket’s advisory board and is a paid adviser for Kalshi. 1789 Capital, the venture capital firm where Trump Jr. is a partner, has invested in Polymarket.

Well-timed trades catch Washington’s attention

The Associated Press reported this month that a group of new accounts on Polymarket made highly specific, well-timed bets on whether the U.S. and Iran would reach a ceasefire on April 7, resulting in hundreds of thousands of dollars in profits for these new customers.

On the same day the report was published, the White House warned staff against using private information to trade on prediction markets.

Earlier this year, an anonymous Polymarket user collected more than $400,000 on a January bet predicting the ouster of Venezuelan President Nicolás Maduro, prompting concerns that someone with access to private U.S. government information may have engaged in insider trading.

Sen. Todd Young, an Indiana Republican and former Marine, said he had been concerned about trading in the sports market, “but I became especially concerned about market distortions, improper decision making, and undermining of public trust through self-enrichment after the news broke about Venezuela.”

Young and Sen. Elissa Slotkin, D-Mich., have introduced a bill that would bar federal employees from using nonpublic information to make bets on prediction markets. Their bill is among several bipartisan efforts in Congress to regulate prediction markets.

As he eyes a potential presidential campaign, Democrat Rahm Emanuel proposed a ban on prediction market bets by all federal employees and their families. On Wednesday, he suggested a 10% fee on those markets and online gambling to fund science and health research.

California Gov. Gavin Newsom, another potential Democratic presidential candidate, issued an executive order barring his appointees from using nonpublic information to trade on prediction markets.

For now, there’s no immediate path to passage for any of the bills. But the scrutiny has drawn focus to the differing approaches of the main prediction markets.

Polymarket officials say little publicly and didn’t comment for this story. The market, founded in 2020, operates largely offshore with limited functions in the U.S. that were allowed only after President Donald Trump returned to office.

Kalshi, meanwhile, says it already bans many of the most extreme betting markets and welcomes regulation.

“We support Congress and regulators taking action to police insider trading, keep prediction markets onshore and under federal regulation,” said Kalshi spokesperson Elisabeth Diana. “Not all prediction markets are the same.”

White House spokesman Davis Ingle said Trump has been clear that “members of Congress and other government officials should be prohibited from using nonpublic information for financial benefit.”

Prediction markets bring CFTC into the spotlight

The bet-the-event activity is drawing attention to the Commodity Futures Trading Commission, which oversees the vast trading contracts industry, including prediction markets.

Dennis Kelleher, the president and chief executive of Better Markets, a Washington nonprofit that has pressed for stronger oversight of prediction markets, said the agency “certainly has no experience, expertise, budget, technology to actually in any way supervise, regulate or police gambling on everything from whether it’s Iran, Venezuela, whether it’s reality TV, whether Christ is going to come back before the end of the year.”

The agency, which by law is supposed to have a five-member board including representatives of both political parties, is served now by only one member, Michael Selig, a former CFTC law clerk who went on to represent cryptocurrency clients before Trump appointed him to lead the agency.

That’s sparked concern among congressional Democrats. Sen. Richard Durbin, D-Ill., sent Selig a letter in February noting that the number of enforcement attorneys at the agency’s Chicago office had declined from 20 to zero.

During a Thursday hearing of the House Agriculture Committee, which oversees the CFTC, Selig said the agency was hiring new staff and operating more efficiently. He refused to hold off on completing new regulations until new members were added to the board but insisted he was taking the potential of insider trading seriously.

“Nothing is more important than protecting market integrity,” he said.

Still, the agency’s enforcement authority extends only to prediction markets regulated in the U.S.

For now, that distinction largely applies to Kalshi, which was established in 2018 and promotes its status as a regulated prediction market. Eager to reach American customers, Polymarket has introduced a U.S.-only prediction market platform to conform with U.S. regulations, but that platform currently has a waitlist to participate and is a small fraction of the size of its offshore counterpart.

CFTC’s leadership criticizes Biden and takes on states

Asked at a recent Vanderbilt University forum about the CFTC’s approach to insider trading in unregulated offshore prediction markets, Selig blamed the Biden administration for creating a regulatory environment that he said discouraged companies from operating in the U.S.

As the debate plays out in Washington, multiple states have tried to curtail prediction markets, arguing they are essentially operating as unlicensed gambling platforms. But the CFTC has responded forcefully to assert itself as the sole regulator, suing Connecticut, Arizona and Illinois this month.

That leaves Washington at a strange juncture, with widespread agreement among lawmakers that something should be done to address the issue of prediction markets. But there are differing thoughts on the scope of a solution.

Young acknowledged his proposal is just a first step, and said lawmakers have a lot to learn about prediction markets.

“But I think we can all agree at this early stage, as usage of these platforms grows and real money is put at stake, that this is a measure that should be taken immediately,” he said.

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Sweet reported from New York. Associated Press writer Susan Haigh in Hartford, Connecticut, contributed to this report.