Washington’s investigation into the wild world of prediction markets is about to enter its final phase.
The landmark federal case against a US soldier who allegedly used the capture of Venezuela’s then-leader Nicolas Maduro to trade classified information is fueling demand for new guardrails around booming prediction markets.
Lawmakers have expressed concerns that the alleged trade could jeopardize a military operation with potentially deadly consequences. The allegations come just days after a leading market banned several Congress candidates for betting on their own elections.
“This is going to be the top emerging issue in finance,” said the Chairman of House Financial Services. French HillAn Arkansas Republican whose committee plays a key role in overseeing the regulation of the financial markets. Members are trying to get up to speed on the issue and “not trying to be biased,” he said at an event on Friday. “We’re all going to deal with this.”
The episodes could prove to be a tipping point for Congress, regulators and President Donald Trump’s administration to place new guardrails on a deep-pocketed industry that has fast become a Washington powerhouse.
Prediction markets like PolyMarket and Kalashi are a type of financial exchange that offer users a Cheesecake Factory-like menu of bets that spans US elections, Major League Baseball games, and beyond.
The companies have moved aggressively in recent years to build their own networks of political and financial advisers, including Donald Trump Jr. The president’s eldest son is an advisor to both companies, while the venture capital firm he works for, 1789 Capital, is a Polymarket investor. Both Polymarket and Kalashi have also received major support from Wall Street and Silicon Valley giants, which has helped boost their valuations to tremendous heights.
Insider trading has topped prediction markets for executives across the political spectrum in recent months, following a series of well-publicized and seemingly questionable bets on the Iran war, Maduro’s capture and even the Paris weather.
Illinois Gov. JB Pritzker signed it earlier this week an executive order Explicitly prohibiting state officials from using privileged information to trade in the markets, while New York Gov. Kathy Hochul did the same Next day. A White House official, granting anonymity to speak freely, said that ethics rules prevent government employees from using privileged non-public government information for personal gain, including betting. and Wall Street promoter have been warning That they were preparing to crack down.
But the arrest of a U.S. service member in connection with bets on Polymarket linked to Maduro’s fall could put new pressure on policymakers, according to more than a half-dozen lawmakers, former regulators and industry executives.
On Thursday, the Justice Department and the Commodity Futures Trading Commission charged Master Sergeant Gannon Ken Van Dyke, 38, who allegedly made more than $400,000 on bets related to Maduro’s capture. Prosecutors said Van Dyke was involved in the planning of the operation.
Former CFTC Commissioner Christy Goldsmith Romero said, “This is something that really has to stop.” “We can’t do insider trading in these markets.”
Prediction market proponents have touted Van Dyke’s allegations as evidence that the industry and regulators are appropriately – and forcefully – controlling the markets. He says insider trading is already prohibited on CFTC-regulated markets like Kalashi. And this is not uncommon on other parts of Wall Street, where it is often caught even after the fact: The oil futures market has fallen. common concern About various well-timed bets in recent weeks.
But one industry executive, who was granted anonymity to speak candidly, said prediction markets need to “reflect, take their medicine, adjust and evolve.”
“Some of these contracts could potentially have violence associated with them that should not be listed on, full stop,” the official said. “However, the idea that you would get rid of any geopolitical contracts that anyone might consider sensitive is not going to be on the table. Now is the time for clean and clear self-regulation.”
Lawmakers are already jumping on the news. In a statement, Sen. Todd YoungAn Indiana Republican, who has introduced bipartisan legislation to bar everyone from the president to congressional staffers from trading in the markets, told POLITICO he was “glad to see that more people are taking these insider trading concerns seriously.”
“This selfish act could have harmed other brave soldiers,” Young said. “We need to implement protections to prevent public servants from profiting from insider information.”
Sen Bernie MorenoAn Ohio Republican said Friday he will introduce a resolution to ban U.S. senators from trading in prediction markets. And Sen. Richard BlumenthalA Connecticut Democrat told Politico before Van Dyke’s allegations that prediction markets would be “an area of focus” if Democrats take control of Congress this November.
Even Trump himself has expressed concern. Speaking to reporters in the Oval Office shortly after the charges were announced, he said, “Unfortunately, the whole world has become a casino to some extent,” before mentioning “prediction markets.”
“It’s a crazy world,” he said. “It’s a very different world than it was before.”
White House spokesman Davis Ingle said in a statement that while Trump “wants a strong and profitable stock market for all, members of Congress and other government officials should be prohibited from using non-public information for financial gain.”
Others are urging caution. In an interview last month, Rep. dusty johnson A Republican on the House Agriculture Committee, John C. of South Dakota, said he wanted members to “try to come together to all agree on the facts, understand the legal basis for these products and chart a course together for where we want to go.”
CFTC Chairman Michael Selig, who has been a major booster of prediction markets, said in a statement Following the allegation Van Dyke said he would be “absolutely clear that anyone who engages in fraud, manipulation or insider trading in any of our markets will face the full force of the law.” And the companies themselves have already implemented various measures aimed at thwarting insider trading on their platforms.
on friday, in a post on xPolyMarket CEO Shayne Coplan wrote that his company referred trading on Van Dyke’s account to the authorities and cooperated throughout the investigation.
“This continues to happen behind the scenes, despite what many people are led to believe,” he wrote, adding that Polymarket’s cryptocurrency underpinnings allows for additional transparency in trading on its platform. “Every trade is public, permanent and auditable. Bad actors leave their mark.”
Van Dyke was charged with violations of the Commodity Exchange Act, wire fraud and illegal monetary transactions. The individual maximum sentences for each could range between 10 and 20 years, according to prosecutors.
He was able to trade through Polymarket’s international platform, which is not supervised by the CFTC and is not supposed to be open to U.S. clients under the terms of a 2022 agreement with regulators. According to the complaint, Van Dyke allegedly concealed his location by using a virtual private network, which allowed him to trade on Polymarket.
A person familiar with Polymarket’s operations, who was granted anonymity to speak freely, said that VPN use on its platform “is an area of continued focus” for the company. PolyMarkets is currently working to fully launch its CFTC-regulated exchange and “the last thing in the world the company wants is to do something that will prevent it from being able to fully operate in the U.S.,” the person said.
Earlier this week, Kalshi, which is regulated by the CFTC, issued a five-year ban against three congressional candidates who traded in their own polls against the exchange’s rules. Kalshi spokesperson Elizabeth Diana said in a statement that Kalshi identifies its clients, prohibits insider trading and maintains adequate market surveillance on its platform. “We are regulated in the US and we have strict rules to keep our customers safe,” he said, adding, “Regulation matters.”
And this, combined with the Van Dyke case, is a clear signal to some that regulators, prosecutors and the industry itself are moving to take stronger action.
“This puts flesh on the bones” of regulators’ warnings, said former DOJ and CFTC lawyer Liz Davis, now a partner at Davis Wright Tremaine. “It definitely sends the shot across the bow.”
Katherine Hapgood and Jasper Goodman contributed to this report.
