New Bill Seeks to Curb Prediction Market Insider Trading

The US government has launched a new effort to regulate prediction markets, which have emerged as one of the nation’s fastest-growing sectors. Lawmakers are moving to restrict platforms that allow users to bet on everything from military actions to political decisions, arguing that such platforms pose risks far greater than those associated with traditional gambling.

Some Contract Types Pose Inherent Risks

The initiative revolves around new legislation introduced by Senator Chris Murphy and Congressman Greg Casar. Their proposal, dubbed the BETS OFF Act, would make it illegal to operate markets tied to sensitive government actions or events where insider knowledge could influence outcomes. The bill aligns with growing discontent over platforms like Kalshi and Polymarket, which have gained traction by offering contracts tied to real-world outcomes.

Supporters of prediction markets argue that such platforms can gather vast amounts of information and produce surprisingly accurate forecasts. However, critics contend that the system is vulnerable to manipulation and insider advantage. Murphy echoed these concerns, arguing that allowing wagers on events like military action or government decisions could incentivize insiders to distort decision-making.

These are fundamentally corrupt markets. They are rife with insider trading, and they offer incredibly perverse incentives for government actors to push official decision-making towards their financial interests.

Senator Chris Murphy

Casar likewise warned that contracts based on the decisions of a small circle of decision-makers were inherently risky. The existence of these markets could even incentivize bad actors to influence events for profit. Lawmakers pointed to a spike in betting activity tied to potential US military action against Iran, where several people placed substantial bets right before the airstrikes happened.

Prediction Markets Face Rising Scrutiny

The proposed legislation would establish clear limits, completely banning contracts tied to war, terrorism, assassination, or official government activities. Markets controlled by a single person or a small group would also be prohibited, as lawmakers fear such contracts are especially prone to abuse. While the Commodity Exchange Act (CEA) already prohibits certain problematic event contracts, the CFTC has been rather lax in enforcing these restrictions.

Prediction market scrutiny has also reached the private sector. JPMorganChase has reportedly begun educating employees about the risks associated with prediction markets to mitigate the misuse of non-public information. With a large workforce and access to sensitive data, the bank aims to avoid any suggestion that insider knowledge could leak into these platforms.

The BETS OFF Act is not the first push to rein in prediction markets. Sen. Richard Blumenthal of Connecticut has spearheaded a similar measure addressing insider trading concerns. It also proposes mandatory age requirements and a ban on advertising prediction markets to underage players. Despite rising criticism, most lawmakers are advocating for clearer rules instead of outright bans, indicating that prediction markets are likely here to stay.