Lawmakers in Washington are working on multiple fronts to rein in the most politically toxic corners of the prediction markets after millions of dollars poured into bets tied to U.S.-linked military action in Iran.
Over the past week, several Democratic lawmakers have pursued multiple avenues to rein in the rapidly growing economy.
One effort, led by Rep. Mike Levin and Sen. Chris Murphy, focuses on war-related contracts that critics say should never have been on the list.
Another, led by U.S. Senators Jeff Merkley and Amy Klobuchar, would seek to exclude elected officials and senior executive branch officials from trade event contracts altogether.
The central tensions in these efforts demonstrate that the increasing bets associated with military action, assassinations of leaders, and other national security events have created intolerable incentives and encouraged misuse of non-public information.
Thus, US lawmakers are making a significant effort to nip these activities in the bud and prevent widespread profiteering from these events.
Still, the Commodity Futures Trading Commission (CFTC) is preparing broader regulations that could preserve a legal avenue for many prediction markets rather than shutting down the industry entirely.
How Iranian war bets became the trigger
The immediate spark was a flurry of trading around the joint US-Israeli military action against Iran last weekend.
Reuters reported that $529 million had been wagered on contracts related to the timing of the attacks and another $150 million on contracts related to whether Iranian Supreme Leader Ayatollah Ali Khamenei would be removed from power.
At the same time, crypto analytics firm Bubblemaps pointed out that about ten accounts made about $1.4 million in profits on Polymarket bets funded in the hours before the strikes.
These numbers gave lawmakers a vivid example of the risk they have been warning about for months.
On the social media platform
He argued that such transactions should not be legal, adding:
“A handful of people made large, unusual bets of more than $100,000 on Polymarket – that the US would attack Iran the next day. The Iran War is fueling a new kind of corruption: White House officials secretly profiting from war. It’s disgusting. We must ban it.”
That line of attack reflects how quickly the issue has moved beyond a limited dispute over platform rules.
In Washington, the debate now centers on whether contracts for events related to war, terrorism, murder or other violent outcomes pose a moral hazard, a national security vulnerability, or both.
Onshore and offshore markets differ
The political backlash has also highlighted the divide between regulated US locations and offshore crypto-based platforms.
Kalshi, which operates as a CFTC-regulated exchange, has said it prohibits insider trading and does not list markets directly linked to the death.
About
Nevertheless, the episode still showed how messy these products can become when real-world events overwhelm the assumptions traders bring to the market.
Polymarket is in a different position. The platform currently operates mainly abroad and has defended its model, saying that prediction markets leverage the wisdom of the crowd to make accurate, unbiased predictions. The platform is making significant efforts to re-enter the US market.
However, it is the same platform that has become the symbol of the current resistance, because much of the controversial volume, including Iran-related trade and the market for a global nuclear explosion, was concentrated there.
This division is important because it points to the likely form of any repression.
Washington has the clearest influence on regulated US exchanges such as Kalshi. Offshore locations that rely on crypto rails are more difficult to monitor directly.
So that raises the prospect of a two-tiered market in which the most controversial contracts are pushed abroad, while domestic platforms remain within a narrower regulatory framework.
Notably, CFTC Chairman Michael Selig acknowledged this risk this week when he warned that blocking these markets entirely could simply drive them abroad, “just like crypto.”
US legislative efforts on prediction markets
In light of the above, the policy response now taking shape in Washington can best be understood as three overlapping tracks.
The first is a targeted push on war-related and death-related contracts. Levin and Murphy are working on legislation aimed at banning restrictions on contracts that they say exploit military action or reward access to sensitive information.
Levin believes that the Commodity Exchange Act, which already bans event contracts that conflict with the public interest, still leaves too much room for such bets.
The second is an ethics bill aimed at government officials. Here, Merkley and Klobuchar want to ban the president, vice president, members of Congress and other government officials from trading contracts for trade events.
Merkley framed the issue not as a battle for market innovation, but as a matter of public trust, saying:
“When government officials use non-public information to win a bet, you have the perfect recipe for undermining the public’s belief that government officials are working for the public good, and not for their own personal profit. “Perfectly timed bets on prediction markets have the unmistakable stench of corruption.”
The third track runs through the CFTC itself. On Feb. 4, the agency withdrew the previous administration’s proposed rule for event contracts and said it would pursue a new rulemaking instead.
Then Reuters reported this week that the CFTC had sent an advance notice of proposed regulations to the White House budget office, the first formal step in building a new framework.
Selig has made it clear that he does not want the United States to respond by trying to eliminate the industry. He wants the government to define the rules and maintain federal control over legal contracts.
Meanwhile, this regulatory approach faces resistance at the state level.
On February 17, the CFTC filed an amicus brief in a Ninth Circuit case seeking to reaffirm its exclusive jurisdiction over commodity derivatives markets, including prediction markets.
Selig said CFTC-registered exchanges were facing a “storm of lawsuits” aimed at undermining the agency’s sole regulatory authority.
In other words, Washington isn’t just debating which contracts should be legal. There is also fighting over who gets to decide.
Wall Street is raising the stakes
The timing of these steps comes at a difficult time for policymakers, as prediction markets are no longer a fringe experiment.
Data from crypto research firm Predictefy showed that weekly transactions on these platforms reached almost 45 million, with a notional volume of more than $6 billion.
At the same time, traditional financial institutions such as Intercontinental Exchange, the parent company of the New York Stock Exchange, said in October it would invest up to $2 billion in Polymarket.
That institutional importance complicates politics. For industry investors, this is evidence that prediction markets are becoming part of the mainstream market structure and should be regulated like other derivatives.
To critics, this means that a company once dismissed as something new is now attracting serious capital, while the most inflammatory contracts focus on war, murder and government action.
Considering this, the likely outcome of Washington’s latest regulatory assault is not a blanket ban on prediction markets.
Congress is divided, the CFTC is moving toward regulation rather than ban, and platforms still argue that event contracts can serve legitimate forecasting and hedging functions.
However, the bets on Iran appear to have changed the conversation in one important respect. They gave opponents a vivid example of how prediction markets can collide with national security, official ethics and public outrage all at once.
That makes the next battle less about whether prediction markets should exist and more about which markets Washington is willing to tolerate.
If lawmakers succeed, contracts related to war, death and sensitive government actions could become the first casualties. If regulators act faster than Congress, the US could end up with a narrower, more formalized onshore market as offshore platforms continue to test how far crypto-based betting can go.
Either way, the era in which prediction markets could present themselves as a niche experiment on the fringes of the financial sector is coming to an end.