U.S. Sen. Jeff Merkley (D-Ore,) speaks during a press conference addressing a new policy that demands recipients of foreign military aid to follow international humanitarian law at the U.S. Capitol in Washington, U.S., February 9, 2024.
Nathan Howard | Reuters
Payouts to unnamed bettors after the ouster of former Venezuelan President Nicolás Maduro and the U.S. attack on Iran put prediction markets in the spotlight. Now, lawmakers are trying to block elected officials from getting rich off them.
A previously unreported bill led by Sens. Jeff Merkley, D-Ore., and Amy Klobuchar, D-Minn., being introduced on Thursday would ban the president, vice president and members of Congress from trading event contracts — which allow users to wager on the outcome of specific events. It would also limit prediction market activity for senior executive branch officials and impose fines starting at $10,000 for violators.
“Members receive all sorts of tips and advice,” Merkley said in an interview. “The actual demonstration of insider trading is too difficult to be sufficient to address the problem. The problem becomes both real corruption … and the appearance of corruption and conflict of interest.”
The new legislation is unlikely to become law in the Republican-controlled Congress, but it may serve as a regulatory building block for the nascent industry.
Prediction markets like Polymarket and Kalshi are surging in popularity and allow users to place bets on the outcome of a wide-range of events. Some are trivial, like basketball games and Oscars best picture winners. Others are weightier, like who will win specific political races and whether or not the Federal Reserve will cut interest rates.
The platforms have come under scrutiny from lawmakers and regulators in recent months, particularly after wagers were placed on Polymarket on the fate of Iranian leader Ayatollah Ali Khamenei, who was killed in the U.S.-Israel attacks on Iran last weekend.
A New York Times analysis of Polymarket activity leading up to the Iran strikes found a surge of bets that an attack would happen by the next day.
“There was a suspicious amount of new activity, people making a very specific bet on Friday that we would go to war with Iran on Saturday,” Sen. Chris Murphy, D-Conn., said in a video posted to X on Wednesday. Murphy has said he would introduce legislation to ban trading on government action, though his office did not provide information on timing on Wednesday.
“Obviously there are people close to Donald Trump who on Friday knew what was happening on Saturday. and it is very likely, probable even, that the people that placed those bets were people with inside information,” Murphy said. “We need to raise hell about a new corruption scandal, another one, inside the White House.”
The White House did not respond to a request for comment sent Wednesday.
Even before bettors cashed in on the Iran attack, skepticism was growing among the Democratic ranks.
Sen. Adam Schiff, D-Calif., and five other Democratic senators sent a letter to CFTC Chair Michael Selig urging him to prohibit event contracts that involve betting on physical injury, death, or war.
They cited recent bets on the possible explosion of a NASA spaceship launch, Russia’s invasion of a Ukrainian town and the fate of Maduro.
Merkley’s concerns about prediction markets were exacerbated by the activity around the Iran strikes. But he initially became suspicious after one anonymous Polymarket user made more than $400,000 by correctly predicting the U.S. would invade Venezuela and remove its authoritarian leader.
“That was a case where you had the secretary of State saying ‘we didn’t notify Congress the way we’re supposed to under the law because we were too concerned about a leak,'” Merkley said. “So you’re talking about an incredibly tightly held piece of information. It seems extraordinarily likely that somebody in that tight group conveyed information to someone who traded.”
The bill was introduced after consultation with Kalshi, Merkley said. Kalshi, one of the world’s largest prediction markets, in a statement offered its support for federal regulation generally.
“We support Congress and regulators taking action to police insider trading, and keep prediction markets onshore and under federal regulation,” a spokesperson said via email. “In the past few months, we’ve had outreach from policymakers about work they’re doing to ensure market integrity, and we’re in talks with many of them, including Senator Merkley.”
The proposal also comes days after the launch of a new trade group called Gambling Is Not Investing, which is led by former Trump White House chief of staff Mick Mulvaney and is pushing for tighter state regulations on prediction markets.
But in Congress, at least, GOP lawmakers have not signaled their support for Merkley’s or similar proposals, which means the new measure would be hard to pass into law in a Republican-controlled Congress.
Merkley and Klobuchar’s bill, as introduced, does not have any Republican co-sponsors. Schiff, along with fellow Democratic Sens. Chris Van Hollen of Maryland and Kirsten Gillibrand of New York, have all signed on.
“At the same time that prediction markets have seen huge growth, we have seen increasing reports of misconduct,” Klobuchar said in a statement. “This legislation strengthens the Commodity Futures Trading Commission’s ability to go after bad actors and provides rules of the road to prevent those with confidential government or policy information from exploiting their access for financial gain.”
Rep. Ritchie Torres, D-N.Y., introduced similar legislation in January in the U.S. House after news of the Maduro-related bets broke. His bill would bar elected officials and employees of the federal government from placing prediction market bets on government policy, government action or political outcomes. It does not address enforcement.
“There’s a ban on insider trading in every market, so why should prediction markets be an exception?” Torres said in a brief interview at the Capitol last month. “Prediction markets should be held to the same standard of integrity that governs the rest of the financial system, the rest of the economy.”
Forty-one Democrats and zero Republicans have co-sponsored the Torres proposal, though he said he believes the GOP will eventually buy in.
“I suspect it will have the same trajectory as the ban on stock trading — that it will begin as a democratic priority but over time will become bipartisan,” Torres said. “For me it’s not a question not of if but when. The prediction markets are facing heightened scrutiny and for me a ban on insider trading is the logical place to start.”
Congress has not passed a ban on stock trading by lawmakers.
— Garrett Downs contributed to this story.
Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.