April 16 (UPI) — The rise in prediction markets and an email to White House staff have lawmakers weighing how to regulate them and prevent government officials from trading on nonpublic information.

Newer platforms Kalshi and Polymarket have expanded the popularity of prediction markets, offering trades on everything from weather and sports to politics, policy and war. Unusual betting activity has raised alarms about government employees using non-public information to enrich themselves on these platforms.

Polymarket, an unregulated offshore platform where cryptocurrency is used to wager, allows users to create accounts anonymously. It also has hosted markets on the Iran war, posing questions about when military action against Iran will end, whether Iran will lose control of Kharg Island, and “Will the Iranian regime fall by April 30?”

President Donald Trump and other U.S. officials have the potential to influence some of these questions, questions that have millions of dollars at stake.

As of Wednesday, a volume of more than $25 million had been traded, predicting the date that Trump will announce the end of military operations in Iran. More than $1.9 million has been wagered on June 30 as the target date, with action on both sides of the “yes, no” question.

Insider trading

Members of the White House staff were warned in an email in March about wagering on prediction markets using non-public information. The White House Management Office urged that doing so is a serious offense, prohibited under government ethics regulations.

“If anybody traded on the basis of information that’s non-public information, misappropriated from the United States government in a securities market, in the stock market, in the S&P 500, bonds, stocks, options, swaps, derivatives, all of that stuff, that would be criminal insider trading,” Richard Painter, former chief White House ethics lawyer under President George W. Bush, told UPI.

“But these prediction markets are not securities markets so all the insider trading laws that apply to security trades do not directly apply.”

The anonymity afforded to users on prediction markets makes it challenging to prove someone is trading on insider information, Painter said.

There are several laws that apply to these types of activities, including the STOCK Act that prohibits government officials from using non-public information for private profit.

“You could potentially prosecute someone for leaking government information for such use if they got a share of the profits,” Painter said. “You could try to prosecute them under the bribery statutes, but then you would have to say there was the official act of releasing the government information to a private party in return for the cash payment. I haven’t seen that done before.”

David Bieri, associate professor of public policy at the Virginia Tech School of Public and International Affairs, told UPI that the United States’ regulatory infrastructure has fallen behind innovations in financial markets such as prediction markets.

“We’re dealing with, at the federal level, a regulatory infrastructure in finance that dates back to the New Deal,” Bieri said. “That opens up space for innovative products that ruthlessly exploit these weaknesses of the system and the fact that the legislator is always a step behind things.”

In the case of Kalshi, the regulator that has purview over its activities in the United States is the Commodity Futures Trading Commission.

Earlier this month, the U.S. Third Circuit Court of Appeals ruled that prediction markets cannot be regulated by state sports gambling laws. The case centered around Kalshi offering bets on college sports in New Jersey. This decision reaffirmed the Commodity and Futures Trading Commission’s authority over the prediction market.

Companies operating in the digital space have continued to move faster than Congress and regulators, Bieri explained, citing Uber identifying itself as a technology company, not a transportation company, in California to treat its drivers as independent contractors.

“The problem we’ve been grappling with and the political economy of regulation in the U.S. is such that it makes a lot of sense for entities that need to be regulated to pick in many ways a weak regulator, the CFTC in this instance,” Bieri said. “It’s not a mistake that Kalshi chose to acquire the legal structure for its bets so that it falls under the specific institutional purview of the CFTC. That’s by design.”

White House, Congress respond

White House Press Secretary Karoline Leavitt said allegations that employees in the Trump administration are involved in insider trading on prediction markets are “baseless and irresponsible reporting,” during a press briefing last week.

Whether insider trading is happening or not, the appearance of corruption damages public confidence in the government, Luong said.

“There is a demand for oversight from lawmakers,” Janice Luong, policy associate at the Project on Government Oversight, told UPI. “There is a demand for investigations. The administration should focus on how they can reassure the American people that this is a priority and that they are looking at efforts to crack down on insider trading.”

Michael Selig, chairman of the Commodity Futures Trading Commission, will testify before the House Agriculture Committee on Thursday. He is expected to be questioned about efforts to regulate prediction markets.

Members of Congress have put forth more than 10 bills to regulate prediction markets.

Sen. Adam Schiff, D-Calif., and Rep. Mike Levin, D-Calif., introduced the Death Bets Act last month to ban references to terrorism, assassination, war and an individual’s death on prediction markets. Ritchie Torres, D-N.Y., introduced a bill in January to ban government officials from using prediction markets.

The Commodity Futures Trading Commission Rule 40.11 prohibits trading or swapping contracts that relate to or reference terrorism, assassination, war or any activity that is unlawful under state or federal law.

Sen. Elizabeth Warren, D-Mass., published a press release last month saying that more than 40 lawmakers are calling on regulators to address illegal insider trading in prediction markets. The press release highlighted examples of suspicious betting activity and the possibility that federal employees have been involved.

“A Polymarket user made $400,000 betting on the capture of Venezuela’s former leader, Nicolas Maduro,” the press release reads. “Prediction market users projected that White House Press Secretary Karoline Leavitt’s speech would last for less than 65 minutes and profited when she abruptly ended the speech about 30 seconds before the 65-minute mark.”

How prediction markets differ from securities, sports betting

The question lawmakers, regulators and the judicial branch are facing with prediction markets is “what’s the difference between gambling and these event contracts,” Luong said. “Even though these prediction markets have similar rules to securities and other financial tools, it remains largely unenforced or there’s a lack of enforcement.”

The model for prediction markets shares similarities with sports betting but Rajiv Sethi, professor of economics at Barnard College at Columbia University, told UPI they are more similar to the stock exchange. Yet there are still differences that distinguish them from any other financial market. This makes regulating them more challenging.

Kalshi, based in New York City, is listed as a Designated Contract Market, regulated by the Commodity Futures Trading Commission, unlike Polymarket. This means the CFTC, an independent federal agency, has oversight to determine that Kalshi is living up to the standards created by the Commodity Exchange Act. Kalshi is required to maintain a level of transparency, work toward identifying and protecting against insider trading and must verify the identities of account holders.

Sethi explains that while sports bettors are betting against the bookmaker, who also faces risks over the outcome of an event, people trading event contracts on prediction markets are pitted against each other. They buy, sell and trade contacts based on “yes” or “no” outcomes. The market takes a fee from the participants no matter what the outcome is.

Where prediction markets become more similar to the stock exchange is in the ability to buy and then sell at will, rather than being locked in to one side of a bet in sports betting.

“It is true that you are betting on whether an outcome will occur or not occur,” Sethi said. “But the bets are liquid contracts. You can buy now and sell 10 minutes later if you like. That’s the biggest difference.”

The nature of the contracts opens the door for concerning activity as well, Sethi adds.

In the case of Polymarket, where users are anonymous, it is possible to create multiple accounts and trade with yourself, referred to as wash trading. This makes it difficult to measure just how much real activity there is on any contract.

Wash trading is an illegal form of market manipulation in the United States.

“That’s quite prevalent on Polymarket,” Sethi said. “People buying and selling contracts from themselves effectively or through collusive partners, to give the appearance that there’s a lot of trading interest in the market.”