Predictive betting platforms like Kalshi and Polymarket turn the outcomes of real-world events—including war, terrorism, and public policy—into tradable financial instruments. Users trade event-based derivative contracts based on the probability that an event will occur. Markets exist on whether Israel will strike Gaza on a given day, if Ayatollah Khamenei will be ousted by the end of March, or the over-under on Trump administration deportations.
Proponents of such markets argue that predictive betting democratizes financial speculation. Platforms “flatten expertise” and allow anyone to “profit from being correct.” Credentials and institutional expertise are devalued in favor of accuracy, or so the argument goes. Yet, if accuracy is what matters, then it follows that traders with better information stand to gain more. Thus, democratization of access, in reality, is a facade behind which insider trading offers outsized returns.
Even more pressing is that the current regulatory regime for these markets is marred by a lack of oversight regarding insider trading by employees of the U.S. Government and members of the national security community.
Personnel operating under Titles 10, 22, and 50 U.S. Code—whether civilian analysts, diplomats, military brass, or intelligence officers—possess material non-public access to operational planning, intelligence assessments, and classified decision-making. If those same personnel hold financial positions in markets that settle on the outcomes of their decisions, it creates structurally misaligned incentives. Profit-seeking motivations bias national-security decision-making processes, compromise operational security, and undermine public trust.
How Do Event Contracts Work?
Unlike traditional securities, like stocks and bonds, which are regulated by the Securities and Exchange Commission (SEC), event-contracts are a type of financial instrument known as a derivative, placing them under the regulation of the Commodity Futures Trading Commission (CFTC). While securities confer equity ownership in an enterprise, derivatives are contracts between parties that derive value from underlying assets. Rather than conferring ownership, derivatives allow traders to speculate on the future value of an asset. In the case of event-contracts, the underlying assets are the outcomes of events.
When a user trades on Kalshi or Polymarket, they are confronted with a binary choice: ‘Yes’ (the outcome occurs) or ‘No’ (the outcome doesn’t). For example, this bet asks, “Will the Iranian regime fall by June 30?” A trader might buy ‘Yes’ at 37¢ per contract, reflecting a 37% probability that the regime falls, or ‘No’ at 63¢ per contract, reflecting a 63% chance that the regime survives. The price of a binary contract is inversely proportional; a 37¢ ‘Yes’ contract corresponds with a 63¢ ‘No’ contract—reflecting a sum of 100% or $1. Upon resolution, each contract pays $1 if the prediction is correct and $0 if it is incorrect. If the Iranian regime falls by June 30, a trader who bought ‘Yes’ at 37¢ would earn 63¢ profit per contract.
There is a secondary way that users can make money on these platforms. Instead of waiting for the market to settle on the outcome of an event, users have the option to sell their contracts back to the market. A trader who bought a ‘Yes’ contract at 37% probability in January and sold at 80% probability in April would make 43¢ per contract, securing a profit regardless of the event’s outcome in June.
Predictive betting markets resemble traditional gambling, however differ from casinos and sports betting in a crucial way. In traditional gambling, bettors play against the house. Wins for bettors are losses for the house and vice versa. On predictive betting platforms, however, bettors trade against each other. A 63¢ payout for a correct ‘Yes’ contract is paid by the losing bettors who bought the ‘No’ contract, not by Kalshi or Polymarket. If a trader makes money based on insider information, it’s not the house that loses, it’s the retail traders who do not have privileged access. The platforms generate revenue through transaction fees, turning a profit regardless of market outcomes. This does not, however, mean that these platforms are not generating significant revenue. Monthly trading volume on these platforms is in excess of $13 billion, with analysts projecting that the industry could top $1 trillion in annual volume by 2030.
Recent events have shaken confidence that the platforms are willing and able to prevent insider trading.
According to reporting by the Wall Street Journal (WSJ), just hours before President Trump ordered the U.S. military to capture Nicolás Maduro, a trader on Polymarket doubled down on bets that Maduro would be ousted from power. The trader bought $34,000 worth of contracts at 8% probability, cashing in $410,000 in profit. The founder of Polysights, Tre Upshaw, told the WSJ “it’s more likely than not that this was an insider. That’s a lot of money to put in at that price, without a lot of news.” However, the identity of the trader remains unknown.
In November 2025, a staffer at the Institute for the Study of War (ISW) lost their job after manipulating an ISW map of the war in Ukraine to coincide with the closing of a Polymarket contract. The bet hinged on whether Russian forces would take the town of Myrnohrad by nightfall on November 15. Despite the non-occurrence of this event, just before the bet closed, the ISW staffer altered the map to show a Russian capture of the town, distorting a market that had $1.3 million of trading volume.
On February 12, the New York Times reported on an insider trading scandal involving service members of the Israeli military. According to the article, several Israeli civilians and reservists were recently arrested, while two were charged in an ongoing investigation involving trades made on Polymarket “based on classified information to which the reservists were exposed by virtue of their role in the army.”
According to the blockchain analytics firm Bubblemaps, six Polymarket accounts made $1.2 million off bets related to the February 28 U.S.-Israeli strikes on Iran. At least five of the accounts joined Polymarket this month, and all six of them have only bet on this specific market. One account netted $500,000 off a $60,000 investment, a return of 821%. Forbes reports that all six accounts were funded within 24 hours of the strikes. Further, they allege that the trading pattern suggests “a single operator distributing funds across multiple accounts to avoid detection.” Another account, named Magamyman, netted over $500,000 on the strikes, placing the first bet just seventy-one minutes before the first strike. The circumstances of these trades raise serious questions about potential insider trading.
However, the people controlling these platforms don’t see these cases as transgressive. Asked whether insider trading should be allowed on these platforms, the CEO of Coinbase, Brian Armstrong, replied, “It’s not a clear-cut question.” To Armstrong, if the goal is predictive power, “you actually want insider trading. You want some admiral sitting on a ship in the Suez Canal to be trading,” because he has good information. According to Polymarket’s founder, Shayne Coplan, people “having an edge on the market is a good thing,” it’s an “inevitability that this will happen and there’s a lot of benefits.”
These examples and attitudes are cautionary tales that have inspired action to regulate predictive financial markets and prevent more severe transgressions. Representative Richie Torres recently introduced The Public Integrity in Financial Prediction Markets Act which targets insider trading on prediction markets. The act bans certain government employees from using non-public information to trade event-contracts which are related to government policy, government action, or political outcomes.
However, this proposed legislation adds nothing new to the existing inadequate regulatory regime. The current enforcement model under the Commodity Exchange Act (CEA) already makes it unlawful for government employees to trade event-based contracts based on non-public information. Where both Torres’s bill and the CEA stumble is that they legislate a conduct-based prohibition. In other words, it only triggers if investigators can prove that specific classified or non-public information was knowingly used for profit. In the opaque world of national security—where information is classified, causation is diffuse and uncertain, and decision-making is compartmentalized—this threshold is difficult, if not impossible, to enforce.
At present, there is no public evidence that government officials have placed bets on outcomes that hinge on their decisions. However, this exposes the fundamental problem: if they have, the public is unlikely to ever find out.
Instead of conduct-based, regulation of government employees’ use of prediction markets should be structural. In other words, a priori rather than ex post facto. Lessons can be learned from how the SEC and the Federal Reserve regulate their employees. Under 5 CFR § 4401.102, SEC employees cannot trade in securities that are regulated by the Commission or trade in derivatives. Furthermore, prior clearance is required for all securities transactions, with documentation considered prima facie evidence that an employee has not violated the law. At the Federal Reserve, senior employees are prohibited from holding investments in “individual stocks,… bonds, agency securities, cryptocurrencies, commodities… [and] derivatives contracts.” Instead of doling out punishment if the government can later prove that an employee abused material non-public information, these regulatory regimes structurally ban the holding of selected financial instruments as such.
Because employees’ authorities determine contract settlement in these markets, the regulatory regime for event-contracts should preclude officials from trading contracts related to government policy, government action, or political outcomes as such, regardless of whether or not an inspector general can later prove that an employee used non-public information.
This conversation does, however, belie an even cleaner fix; one which is already statutorily authorized. Section 5c(c)(5)(C) of the CEA states that the CFTC may determine that an event-contract is contrary to the public interest if it involves: “activity that is unlawful under any Federal or State law; terrorism; assassination; war; gaming; or other similar activity determined… to be contrary to the public interest.” Given a determination by the CFTC, any contract found to fall within that scope is required to be delisted.
On June 10, 2024, the CFTC submitted a proposed rule to the Federal Register to specify which event-contracts “fall within the scope of section 5c(c)(5)(C)” and to reduce “the need to undertake individualized, resource-intensive contract reviews.” The new approach would automatically “presume an event-contract involving an Enumerated Activity is contrary to the public interest,” and therefore illegal. This proposed rule, however, was never adopted, leaving the door open for prediction markets to continue financializing every aspect of daily life.
Such a deregulatory approach fits well with the perspective of Mike Selig, the Trump-appointed Commissioner of the CFTC who wrote in an op-ed on January 20 that the CFTC will aim to “deliver the minimum effective dose of regulation,” putting an “end to policymaking through enforcement.” Less than a month later, on February 12, the CFTC announced the creation of the “Innovation Advisory Committee.” The committee, which will “ensure the CFTC’s decisions reflect market realities” and inform the development of “clear rules of the road,” is composed of representatives from the very companies that the CFTC is tasked with regulating. Among these committee members are the CEOs of Kalshi, Polymarket, Coinbase, and DraftKings. The term regulatory capture—describing the phenomenon in which the government takes on the perspective of the industry it is meant to regulate—is an apt description of the emerging relationship between the CFTC and industry.
The federal government is publicly denouncing enforcement while actively soliciting official regulatory input from derivatives exchanges. As such, the dis-incentives which might prevent insider trading are not currently in force.
There are three primary vectors through which insider trading by government officials generates national security risk.
First, monetizing national-security-related events introduces perverse incentives that may distort how decision-makers assess options and risks. Financial incentives are unlikely to determine whether a specific military operation goes forward. However, decision-makers with exposure to markets may overweight scenarios aligned with their financial positions or favor less ambiguous policy options that have clear contract settlement.
Second, unusual trading activity—particularly large positions taken at unfavorable odds—can tip off adversaries and undermine operational security. The potential for informal disclosure through personal networks might create market movement, which itself acts as a signal. Even if actors believe they are trading privately, sudden market shifts can expose not just what might happen, but when.
Finally, the prospect of officials personally profiting from non-public information undermines public confidence in the neutrality and legitimacy of government actions. Trust is hard to build, but easy to destroy. Democratic governance rests upon the foundation of legitimacy and the consent of the governed. A democracy cannot credibly ask its citizens to accept secret, coercive, and violent state action if those actions are simultaneously transformed into speculative financial opportunities.
When war becomes a tradable asset, its prolongation is incentivized. If diplomatic negotiations are financialized, peace becomes an obstacle to profits. So long as covert action is an opportunity to cash in, the mission is no longer the only north star. The potential for the national security community to trade on government policy subordinates the most important level of decision-making—that of life and death—to the logic of the market. This erodes the core function of the public-private distinction, which holds that the public sector exists to prioritize the intangible assets of inalienable rights, responsible governance, and the protection of the governed.
Regulators Face A Choice.
To Kalshi’s CEO, Tarek Mansour, “the long-term vision is to financialize everything and create a tradable asset out of any difference of opinion.” The question regulators face is whether Mansour’s vision is in the best interest of the public.
Either prediction markets continue to subordinate life itself to market logic, or as a democracy, U.S. citizens demand that there are limits to what should be commodified.
Regulators at the CFTC should leverage their congressionally granted authority to delist contracts contrary to the public interest and preclude trades that financialize national security policy. If they fail to do so, Congress should draft legislation that structurally bans Title 10, 22, and 50 federal employees from trading contracts related to government policy, government action, or political outcomes. Enforcement mechanisms, including mandatory prior clearance and documentation for all derivatives trades, should help ensure that insider trading is not occurring in the national security community.
Views expressed are the author’s own and do not represent the views of GSSR, Georgetown University, or any other entity. Image Credit: The New York Times