The prediction market backlash has arrived

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War is no sport. But prediction markets are allowing spectators to gamble and profit off conflict between nations as if it were.

Prediction market platforms like Kalshi and Polymarket have boomed in popularity over the past year in part due to a marketing blitz and a hands-off regulatory approach from the Trump administration. Now Americans are placing a flood of bets on everything from weather forecasts, sporting events, and even the length of White House press conferences. Total trading volume on Kalshi reached $24 billion last year. 

Recently, the prediction market craze extended to whether Iran’s supreme leader, Ayatollah Ali Khamenei, would be out of power by March. As the U.S. moved soldiers and military equipment to bases in the Middle East, Kalshi set up the scenario as a “contract” for users to purchase. Payouts fluctuated based on the probability of Khamenei's ouster, and it grew into a $54 million market. Polymarket offered a similar contract.

Now some Democratic lawmakers and experts are raising the alarm over possible insider trading on the platforms by those with privileged access to classified information ahead of U.S.-Israeli strikes on Iran. Blockchain analytics firm Bubblemaps described “six suspected insiders” who made $1.2 million with bets placed on Polymarket just hours before the first wave of attacks.

It didn’t take long for one prominent Democratic senator to promise new legislation to rein in prediction markets “ASAP.”

“It’s insane this is legal,” Sen. Chris Murphy of Connecticut said in a social media post over the weekend. On Wednesday, Murphy specified he wanted to ban prediction market trades related to “government action.”

“There were potentially people inside the Situation Room last week cheerleading America into war because they had made secret bets that were going to pay off,” Murphy said, calling it “dystopian.” 

He told Quartz that he’d been in contact with Republican Senate offices to gather support for the measure. He wants introduce it sometime this month.

Other hefty payouts raised eyebrows as well. Democratic Rep. Mike Levin of California pointed to a Polymarket account named “Magamyman” that earned $515,000 in one day by placing the first trade 71 minutes before news broke of the military campaign.

Experts are growing alarmed about the possible monetization of state secrets.

“The floodgates are open,” Amanda Fischer, an ex-SEC staffer who is now policy director at the think tank Better Markets, told Quartz. “The space itself is relatively new. Kalshi is introducing newer and newer products every day.”

The White House rebuffed concerns about insider trading. “The only special interest guiding the Trump Administration’s decision-making is the best interest of the American people,” said Davis Ingle, a White House spokesperson.

‘Financialize everything’

After Khamenei's death, Kalshi froze the contract. It triggered backlash from customers who argued the company cheated them out of hefty payouts. Under federal law, prediction markets are barred from listing wagers that settle based on an assassination.

The company has since moved to refund fees connected to the Khamenei contract and defended its management of the situation.

"Our rules were clear from the beginning, we never changed them, and we settled based on the rules," a Kalshi spokesperson said in a statement, adding the company reimbursed users since it believed payout guidelines could have been clearer.

Kalshi has since stated it is in talks with many lawmakers in Congress to ensure "market integrity." The company consulted with Oregon Democratic Sen. Jeff Merkley on his new bill released Thursday to bar the president, vice president, and members of Congress from trading event contracts. Violators would face fees starting at $10,000.

Other prediction market contracts drew scrutiny as well. On Wednesday, Polymarket removed a market that allowed traders to wager on the likelihood of a nuclear detonation. The company faced criticism that it was allowing traders to profit off a lethal event.

This is the bet-crazed world that prediction markets are building, one contract at a time. Kalshi co-founder Tarek Mansour once described a mission for the company to create a financial realm where virtually any disagreement among individuals can be bought or sold at the press of a button.

“The long-term vision is to financialize everything and create a tradable asset out of any difference in opinion,” Mansour said last year at the Citadel Securities conference. Kalshi reached an $11 billion valuation in December.

Polymarket, meanwhile, is highly popular with a $9 billion valuation. However, trading on that platform is underpinned by cryptocurrencies and considered off-limits in the U.S. Still, it hasn’t kept many Americans from flocking to the platform through virtual private networks. The vast majority of betting on Kalshi and Polymarket revolves around sporting events.

The earliest prediction markets originated not from finance, but academia. The Iowa Electronic Markets first launched in 1988 and allowed limited trading on political outcomes. Just over a decade later, the Ireland-based company Intrade gained mainstream popularity by offering contracts on the outcomes of political events, award shows and more. 

Pressure from U.S. regulators that Intrade was operating an illegal gambling platform eventually forced its closure in 2013.

Prediction markets are regulated by the Commodity Futures Trading Commission, a federal agency that has shrunk in size under the Trump administration. Fischer observed that the CFTC’s Chicago office recently lost its last enforcement attorney out of a team that once numbered 20.

“The CFTC is not well equipped to police these markets,” Fischer said. “They do not have nearly enough staff or expertise to look through the thousands of contracts that these prediction market platforms list and see if they have adequate internal controls to police against insiders using information outside of the law.”

Kalshi and Polymarket both faced a flurry of lawsuits from state regulators with the former dealing with at least 20 lawsuits. Most of them argue that the firms are operating gambling platforms that should be subject to stricter regulations and reporting controls.

The Trump administration has sought to pre-empt those court challenges by upholding its ability to design guardrails at the federal level. Last month, the CFTC withdrew a Biden-era rule that would have barred bets on sporting events and politics. CFTC chair Michael Selig has since said the agency would write new rules on the prediction market industry. 

Backlash from the right is growing. Mick Mulvaney, a former chief of staff to President Donald Trump, launched a new advocacy group on Monday named “Gambling Is Not Investing.” They’re seeking to apply state and tribal regulations related to sports gambling on Kalshi and Polymarket.

Alex Jacquez, policy director at the left-leaning Groundwork Collaborative think tank and an ex-Biden White House aide, told Quartz he’s heard from conservative policy experts interested in prediction market guardrails. He illustrated a world in which everything is bet on if the platforms grow unchecked.

“We’re just gonna see every single moment is going to have Kalshi odds attached to it, and our entire orientation of society is just going to turn into a sequence of micro transactions or microevents that settle or don't,” Jacquez said. “It's kind of a dystopian way to think about it.”