After $679 million in Iran war bets, Democrats move to ban prediction markets tied to military action

Washington lawmakers are intensifying efforts to regulate prediction markets, particularly those involving sensitive events like military actions, following a surge in wagers tied to US-linked military operations in Iran. Several legislative paths are being pursued to curb what critics describe as politically toxic corners of the prediction market, citing concerns over intolerable incentives and the potential abuse of nonpublic information.

Legislative Efforts and Key Concerns

Representatives Mike Levin and Senator Chris Murphy are focusing on banning war-related contracts, arguing they should never have been listed. Concurrently, Senators Jeff Merkley and Amy Klobuchar are proposing legislation to bar elected officials and senior executive branch officials from trading event contracts altogether. These initiatives highlight the growing unease in Washington regarding the mounting wagers on national security events, which are seen as creating significant ethical and security risks.

The immediate catalyst for this legislative push was the significant trading volume surrounding the recent US-Israel joint military action against Iran. Reports indicated that approximately $529 million was wagered on contracts related to the timing of attacks, and another $150 million on whether Iran’s Supreme Leader Ayatollah Ali Khamenei would be removed from power. Crypto analytics firm Bubblemaps also identified about 10 accounts that profited around $1.4 million on Polymarket bets funded just hours before the strikes, providing lawmakers with a concrete example of potential insider trading.

Senator Murphy stated on X, “A handful of people made big, unusual $100,000+ bets on Polymarket – that the U.S. would strike Iran the next day. The Iran War is fueling a new kind of corruption: White House officials secretly profiting off war. It's disgusting. We need to ban it.” This sentiment underscores the view that event contracts tied to war, terrorism, or assassination pose a moral hazard and a national security vulnerability.

Divergence Between Onshore and Offshore Markets

The political backlash has also illuminated the distinction between regulated US venues and offshore crypto-based platforms. Kalshi, a CFTC-regulated exchange, asserts it bans insider trading and does not list markets tied to death. However, platforms like Polymarket, which largely operate overseas, defend their model by claiming prediction markets harness collective wisdom for accurate forecasts and are actively seeking to re-enter the US market. Polymarket has become a focal point due to substantial controversial trading volume, including Iran-related bets and a market on a global nuclear explosion.

This divergence suggests a potential two-tier market: regulated US exchanges operating within a narrower perimeter, while offshore venues using crypto rails become harder to police. CFTC Chairman Michael Selig acknowledged this risk, warning that an outright ban could simply drive these markets offshore, similar to the trajectory of cryptocurrency.

CFTC's Regulatory Approach and Broader Market Context

The Commodity Futures Trading Commission (CFTC) is pursuing a broader rulemaking strategy rather than an outright shutdown. The agency withdrew a previous administration's proposed rule and is now developing a new framework, aiming to define rules and preserve federal control over lawful contracts. CFTC Chairman Selig has expressed a preference for regulation over prohibition, emphasizing the need to prevent markets from moving entirely offshore.

This regulatory landscape is complicated by ongoing legal battles over jurisdiction. The CFTC is actively defending its exclusive authority over commodity derivatives markets, including prediction markets, against state-level challenges. This fight over who decides the regulatory framework is as critical as the debate over which contracts should be legal.

The timing of these regulatory actions is significant as prediction markets are no longer a fringe phenomenon. Data shows weekly transactions reaching nearly 45 million, with notional volume exceeding $6 billion. Traditional financial institutions, such as Intercontinental Exchange (parent of the NYSE), have invested up to $2 billion in Polymarket, indicating mainstream financial interest. While industry backers see this as a sign of market maturation, critics view it as serious capital flowing into markets centered on inflammatory topics.

The likely outcome is not a blanket ban, given divisions in Congress and the CFTC's rulemaking approach. However, the Iran wagers have undeniably shifted the conversation, providing a stark example of how prediction markets can intersect with national security, official ethics, and public sentiment. The future regulatory landscape will likely focus on which types of contracts Washington is willing to tolerate, potentially leading to the elimination of war and death-related contracts while onshore platforms operate under stricter guidelines.