Ahead of the Trump administration’s military strikes against Iran on February 28, hundreds of millions of dollars in bets were made on the timing of the attacks. This included six new Polymarket accounts that collectively made $1.2 million in profits from bets funded only hours before the attacks. Similarly, hours before the United States removed Venezuelan President Nicolás Maduro from power in early January, an anonymous trader set up a new Polymarket account to make a $30,000 bet on his ouster, netting a profit of more than $436,000.
The precision and timing of bets made hours ahead of surprise uses of American military power begs the question of whether government officials, defense contractors, or others with inside knowledge of events are tapping prediction markets to make ill-gotten gains. While big questions about the proper oversight of prediction markets should be addressed in due course, Congress must act now to halt profiteering on sensitive government information.
What are prediction markets?
Prediction markets are digital platforms where anyone can bet, often anonymously, on the outcomes of a wide array of sports or other events—nearly anything that could happen. These characteristics have created the conditions for possible corruption by insiders who can leverage inside knowledge to place bets on outcomes where they receive advanced information or even can influence those outcomes directly. These risks were illustrated recently through federal investigations of National Basketball Association (NBA) players who allegedly took themselves out of games or provided bettors with inside information in order to profit from bets made on gambling apps. Now, a similar pattern may be emerging among government officials in their use of prediction markets.
Government insiders can exploit prediction markets for personal gain
Profiting from inside information is much easier on prediction markets than the typical stock trading cases of recent history. The digital bets are set up on loosely regulated platforms and can be executed on a phone with a mere click on an app. Moreover, these bets can be placed on almost anything. While sports betting makes up the majority of transactions, that is rapidly changing: More events are being covered, and creative minds are thinking of ever more ways to break down those events into multiple bets. The digital infrastructure makes for endless possibilities—and profit.
More importantly, some prediction markets, such as Polymarket, allow bets to be made using cryptocurrency. And crypto offers anonymity. So, it’s not surprising that in both events described above, bets were made anonymously using crypto. According to blockchain analytics platform Bubblemaps, the Iranian attack bets were funded by digital wallets opened within 24 hours of the attack. Similarly, an anonymous Polymarket user placed a bet hours before the U.S. military capture of Maduro on January 3, predicting that he would be out of power by the end of the month.
In an administration where the president has cashed in on the presidency, the use of prediction markets to profit from sensitive government information is likely to continue.
In an administration where the president has cashed in on the presidency, including through crypto ventures, by directing federal government agencies to promote digital assets and his appointees have rolled back regulations and enforcement that would keep corrupt financial practices at bay, the use of prediction markets to profit from sensitive government information is likely to continue. There are many questions to consider in establishing a coherent framework for regulating prediction markets, but Congress can act now to stop government insiders from using prediction markets to profit from their knowledge.
See also
It is clear that the Trump administration has little interest in acting. Faced with attempts to restrict prediction markets by the states of Nevada, New York, and Maryland—which all seek to enforce state gaming laws—the Trump-appointed chair of the Commodity Futures Trading Commission (CFTC), Michael Selig, announced that prediction markets are derivative contracts subject to his agency’s exclusive jurisdiction, despite the fact that the agency has not aggressively enforced its anti-fraud rules in the past. Because prediction markets are new, they are not explicitly mentioned in laws that deal with insider trading, such as those statutes that authorize the CFTC or the U.S. Securities and Exchange Commission to enforce anti-fraud rules; and the Trump-appointed chairs of both agencies are driving a strongly pro-crypto agenda. Thus, the appropriate regulators of prediction markets is an open question that must be resolved.
The potential impacts on national security also deserve close inspection. Some experts have raised questions about the potential national security risks of using inside knowledge of government operations to place bets on prediction markets, especially when those bets are made anonymously. Could the mere placement of a bet reveal sensitive information? Could that prove useful to foreign adversaries and criminals? Could the bet affect the outcome? These are important questions that must be explored and answered.
Congress must take immediate steps to stop use of inside government information to bet on prediction markets
These questions may take time to resolve. There is no dispute, however, that use of inside government information for personal profit should be prohibited. Congress should act right away to explicitly clarify that use of inside government information to make bets on prediction markets is simply illegal. Some members of the House and Senate are already moving forward with such proposals. Congress should consider making the statutory definition of who is an insider broad—including elected officials and their staff, government employees, government contractors, corporate executives who may receive government briefings, and any other individuals who may have inside information. Contractors who participate in military operations deserve special attention. Criminal penalties should apply, along with fines, disgorgement of profits, and suspension from platforms.
But Congress should go further. For example, the opportunity to profit anonymously must be addressed. Prediction market companies should be legally required to obtain basic information about individuals placing bets on their platforms, even if those bets are made with crypto. This should include name, age, and contact information, and betting platforms should be required to verify this information. In addition, warnings should be included in government ethics codes and posted in appropriate places, making clear that prohibitions on unauthorized wagering, betting, trading, or otherwise transacting for profit based on inside information apply to the use of government information to place bets on prediction markets—or enabling others to do so. Congress must clarify immediately that the special case of corrupt profiteering from insider knowledge of government operations and information on prediction markets is strictly prohibited.
The author wishes to thank Michael Negron for his helpful comments on this issue.