Just hours before the United States military strikes in Iran, more than 150 accounts made investments of over $1,000 in event contracts based on the timing of the strikes, with six traders together making more than $1.2 million.
In traditional betting, an individual places a wager on an outcome with odds set by a bookmaker that determine winnings. But in a prediction market, a trader buys shares in an outcome of an event. There are no odds, and share prices fluctuate based on market responses, allowing investors to turn a profit if they sell high or if their chosen outcome proves correct.
Our classified military strikes should not provide an opportunity for bettors to play and profit. Underregulated prediction markets have exposed America to needless public safety and national security risks by allowing traders to invest in outcomes related to sensitive matters like terrorism, assassination, war or elections.
This nonpartisan issue has spiraled out of control, and Congress needs to pass legislation to require enforcement.
Congress previously included a subtle provision in the Commodity Exchange Act that preempts state regulation of betting when it is offered through event contracts. This loophole has opened a door to gambling on anything from Taylor Swift’s appearance at a Kansas City Chiefs game to when the United States might launch a strike on Cuba.
Sports betting is illegal in 19 states, including Utah, but prediction markets like Kalshi or Polymarket avoid state regulation through this loophole. Rather than offering betting services, they sell event contracts, a legacy financial instrument with payouts based on the outcomes of real-world events.
Well-known gambling companies like FanDuel or DraftKings supplement their business with prediction markets to offer their product in states that do not allow traditional gambling. This violates the spirit of state law and opens the door for leaks and insider trading on sensitive information. There is no reason why traders should be able to make investments in Scottie Scheffler winning the Masters or Gavin Newsom becoming the Democratic presidential nominee.
Congress gave the Commodity Futures Trading Commission exclusive jurisdiction over derivatives markets in 1974. Congress reaffirmed that decision in the wake of the 2008 financial crisis by passing the Dodd-Frank Act, which clarified the commission’s authority to prohibit contracts related to terrorism, assassination, war, gaming, illegal activity or other subjects the commission deems “contrary to the public interest.” Only twice since 2010 has the CFTC ruled to block contracts, both cases involving election-based contracts.
Kalshi was at the center of a 2023 ruling after attempting to list “congressional control contracts” for investors to trade on party majority outcomes in Congress following an election. The CFTC blocked the listing, ruling that such contracts constituted gaming or illegal activity. However, Kalshi challenged this denial in U.S. District Court, and the court concluded that the CFTC had overstepped its authority. Since that decision, event contracts of all stripes have proliferated.
In January, one investor netted more than $400,000 on former Venezuelan President Nicolás Maduro’s fall from power, making the timely purchase just before President Donald Trump announced the deposed leader’s capture. However, the prediction market Kalshi claims that, legally, this is investing, not gambling.
Thirty-six state attorneys general have come together to close what they see as a gambling loophole in states like Utah, where gambling is not permissible. While this litigation is ongoing, prediction markets will remain largely unchecked without congressional action.
I introduced HR7840, the bipartisan Event Contract Enforcement Act, or ECEA, to address these concerns and put an end to reckless event-based gambling. The ECEA strengthens existing law requiring the CFTC to prohibit event contracts related to terrorism, assassination, war, gaming (sports or athletic competitions) or criminal behavior.
The bill also bans trading on election outcomes and government activities to protect our elections from manipulation and insulate the government from insider trading opportunities. Should a state choose to retain sports-related contracts, this law allows it to opt out of enforcement on gaming-specific contracts.
Congress should pass the Event Contract Enforcement Act to bring stability and integrity to prediction markets.