Sen. Jeff Merkley (D-Ore.) speaks at a press conference about a new policy requiring recipients of foreign military aid to comply with international humanitarian law at the U.S. Capitol in Washington, U.S., February 9, 2024.
Nathan Howard | Reuters
Payments to anonymous bettors have drawn attention to prediction markets following the ouster of former Venezuelan President Nicolás Maduro and the US attack on Iran. Now, lawmakers are trying to stop elected officials from making money.
A previously unreported bill introduced Thursday, led by Sens. Jeff Merkley, R-Ore., and Amy Klobuchar, D-Minnesota, would ban the trading of event contracts that allow the president, vice president and members of Congress to bet on the outcome of specific events. It would also restrict prediction market activities by senior government officials and impose fines of up to $10,000 on violators.
“Members are receiving all kinds of tips and advice,” Merkley said in an interview. “Actual demonstration of insider trading is too difficult and not sufficient to address the problem. The problem becomes not only true corruption, but also a manifestation of corruption and conflicts of interest.”
While the new bill is unlikely to pass in the Republican-controlled Congress, it could provide a regulatory basis for the emerging industry.
Prediction markets such as Polymarket and Kalshi are rapidly gaining popularity and allow users to bet on the outcome of a wide range of events. Some are trivial, like a basketball game or a Best Picture Oscar winner. There are also more important factors, such as who wins certain political races and whether the Federal Reserve will cut interest rates.
These platforms have come under intense scrutiny from lawmakers and regulators in recent months, particularly after polymarket bets were placed on the fate of Iranian leader Ayatollah Khamenei, who was killed in last weekend’s attack on Iran by the United States and Israel.
A New York Times analysis of Polymarket’s activities in the lead up to the Iran attack found that there was a sharp increase in expectations that an attack would occur by the next day.
“There’s a suspicious amount of new activity, and on Friday people were making very specific bets that there would be war with Iran on Saturday,” Sen. Chris Murphy, D-Conn., said in a video posted to X on Wednesday. Murphy said he would introduce legislation to ban the trade in response to government action, but his office did not provide information on when that would happen Wednesday.
“Obviously, there are people close to Donald Trump who knew as of Friday what was going on on Saturday, and it’s very likely, even possible, that it was someone with inside information who made those bets,” Murphy said. “We need to make a big fuss about another corruption scandal in the White House, another scandal.”
White House officials noted in an email that gambling and insider trading on government property are already illegal, but did not directly respond to Murphy’s claims.
Even before bettors made a fortune on the Iran attack, skepticism was growing within the Democratic Party.
Sen. Adam Schiff, D-Calif., and five other Democratic senators sent a letter to Commodity Futures Trading Commission Chairman Michael Selig asking him to ban event contracts that involve betting on physical injury, death, or war.
They cited the possible explosion of a NASA spacecraft launch, Russia’s invasion of a Ukrainian town, and recent bets about Maduro’s fate.
Merkley’s concerns about prediction markets were exacerbated by activity surrounding the Iran attack. But he initially became suspicious after one of Polymarket’s anonymous users made more than $400,000 by correctly predicting that the United States would invade Venezuela and remove its authoritarian leader.
“That’s a case where we had the secretary of state say, ‘We didn’t notify Congress as required by law because we were too concerned about the information being compromised,'” Merkley said. “So you’re talking about information that is incredibly closely held. It seems very likely that someone in that tightly-knit group passed the information on to someone they do business with.”
Markley said the bill was introduced in consultation with Kalsi. Calsi, one of the world’s largest prediction markets and regulated by the CFTC, expressed support for federal regulation in general in a statement.
“We support Congress and regulators in cracking down on insider trading and keeping prediction markets federally regulated domestically,” a spokesperson said in an email. “Over the past several months, we have been hearing from policymakers about the work they are doing to ensure the health of our markets, and we are consulting with many policymakers, including Senator Merkley.”
The proposal also comes days after the launch of a new industry group, Gambling Is Not an Investment, led by Trump chief of staff Mick Mulvaney, which is pushing for stronger state regulation of prediction markets.
But Republicans, at least in Congress, have not expressed support for Merkley or similar proposals, meaning any new legislation will be difficult to pass in a Republican-controlled Congress.
Merkley and Klobuchar’s bill, as introduced, has no Republican co-sponsors. Schiff signed on with fellow Democratic senators Chris Van Hollen of Maryland and Kirsten Gillibrand of New York.
“At the same time that prediction markets have grown significantly, reports of fraud have also increased,” Klobuchar said in a statement. “This legislation strengthens the Commodity Futures Trading Commission’s ability to go after bad actors and provides rules to prevent those with sensitive government and policy information from abusing their access for financial gain.”
Rep. Ritchie Torres of New York introduced a similar bill in the U.S. House of Representatives in January after news broke about Maduro-related bets. His bill would prohibit federal elected officials and employees from betting on prediction markets about government policies, actions, or political outcomes. There is no mention of enforcement.
“Insider trading is prohibited in all markets, so why should prediction markets be an exception?” Torres said in a brief interview on Capitol Hill last month. “Prediction markets should be held to the same standards of integrity that govern other parts of the financial system and other parts of the economy.”
Torres’ proposal is co-sponsored by 41 Democrats and zero Republicans, but he said he believes Republicans will ultimately agree to it.
“I think it’s going to follow the same trajectory as the stock trading ban. It starts as a Democratic priority, but over time it becomes a bipartisan thing,” Torres said. “For me, it’s not a question of if, but when. Prediction markets are facing intense scrutiny, and for me a ban on insider trading is a logical starting point.”
Congress has not passed any legislation to ban members from trading stocks.
— Garrett Downs contributed to this article.
Disclosure: CNBC and Kalsi have a commercial relationship that includes customer acquisition and minority ownership.
