Democrats urge CFTC and ethics office to crack down on insider trading in prediction markets
More than 40 Democratic members of Congress are pressing US regulators to explicitly warn federal employees that using nonpublic government information on prediction markets is illegal, amid mounting concerns over possible insider trading on high‑profile platforms.
In a joint letter, at least 42 lawmakers called on the Commodity Futures Trading Commission (CFTC) and the US Office of Government Ethics (OGE) to issue executive‑branch‑wide guidance reminding government workers that they are barred from exploiting privileged information when trading event contracts. The letter says recent activity has raised serious questions about whether some public servants may already be violating federal law.
Addressed to CFTC Chair Mike Selig and the head of the OGE, the message cites “multiple incidents” that have “fueled speculation about possible insider trading in prediction markets by federal employees.” According to the signatories, the absence of clear, high‑profile guidance has created a gray zone in which officials might mistakenly believe that betting on political or geopolitical events falls outside traditional insider‑trading rules.
Prediction markets let users buy and sell contracts tied to future outcomes – such as election results, policy decisions, or major geopolitical events – with prices reflecting the crowd’s estimate of how likely an event is to occur. While advocates say these markets can aggregate information efficiently and improve public forecasting, lawmakers and regulators are increasingly worried that they also create fresh opportunities for those with inside knowledge to profit clandestinely.
The letter underscores that the two largest US‑facing prediction market platforms, Kalshi and Polymarket, have already pledged to install stronger “guardrails” designed to detect and prevent potential abuse. These measures reportedly include improved monitoring of unusual trading patterns and tighter controls around markets that might be especially sensitive from a national security or policy perspective. Still, lawmakers argue that private compliance efforts are no substitute for clear federal standards aimed at public officials.
Several specific trading incidents are highlighted as red flags. One involved users wagering on whether Venezuelan leader Nicolás Maduro would be captured, suggesting traders might have been betting on the timing or likelihood of a covert or diplomatic action. Another concerned contracts tied to the length of a January 7 speech by White House press secretary Karoline Leavitt – a market that, by its nature, could tempt individuals with direct knowledge of planned remarks or schedules.
More recent activity has alarmed national security watchers even further. According to the lawmakers, a number of users executed “suspicious trades” linked to scenarios such as an invasion of Iran and the death of Ayatollah Ali Khamenei. These trades, they warn, raise two distinct concerns: first, that insiders might be monetizing highly sensitive intelligence, and second, that such markets could inadvertently signal impending military or covert operations to outside observers, thereby compounding geopolitical risks.
The letter also references bets on whether former Department of Homeland Security Secretary Kristi Noem would be dismissed from her position. Here too, lawmakers worry that individuals close to internal decision‑making – in the White House, cabinet agencies, or congressional offices – might be tempted to trade on advance knowledge of personnel moves, just as they could be tempted to trade on upcoming regulatory announcements or enforcement actions.
To understand the scale of the problem, the group of Democrats has requested a formal briefing and detailed responses from the CFTC by April 13. Among their questions: Has the CFTC received any complaints or reports involving federal employees suspected of insider trading on prediction markets? Has the agency opened any investigations? And what concrete tools is it using to detect such conduct, particularly in markets that may be lightly regulated or hosted abroad but still accessible to Americans?
The lawmakers are also asking what preventive measures are currently in place to discourage federal workers from using inside information to trade event contracts, and whether the CFTC coordinates on this issue with ethics officials, inspectors general, or law enforcement. They hint that a lack of reporting does not necessarily mean a lack of misconduct; instead, it may indicate that participants believe they can operate undetected in a relatively new and complex market environment.
A key legal anchor for their argument is the STOCK Act, signed into law in 2012 by President Barack Obama. The statute was designed to make explicit that members of Congress, other federal officials, and their staff may not use material, nonpublic information acquired through their official positions for personal financial gain. Traditionally, this law has been discussed in the context of stock trading. The lawmakers now insist that the same principles clearly extend to event contracts, which the CFTC has deemed regulated derivatives.
In their letter, they stress that the CFTC itself “has determined that event contracts are derivatives that depend on the occurrence or non‑occurrence of an event with a potential financial, economic, or commercial consequence.” Because these contracts fall within the derivatives framework, the Democrats contend, they should be treated no differently from futures or swaps when it comes to insider‑trading rules and ethical obligations of federal employees.
This position has broader implications for the rapidly evolving world of prediction markets. If event contracts are categorically treated as financial instruments under the purview of the CFTC, then anyone trading them on the basis of confidential government information could be exposed to the same kinds of legal risks as someone trading stocks on undisclosed earnings data or nonpublic regulatory decisions. That interpretation would significantly raise the compliance stakes for public officials who participate in these markets.
The controversy comes at a time when prediction markets are experiencing renewed popularity and attention, especially around high‑stakes elections and volatile geopolitical developments. Trading volumes have surged in markets tied to conflicts, leadership changes, and major policy decisions. While this activity can produce informative price signals, it also attracts sophisticated traders and, potentially, individuals with access to diplomatic cables, intelligence briefings, or internal policy deliberations.
For ethics experts, the central challenge is defining where legitimate forecasting ends and illegal insider trading begins. A foreign policy analyst who spends years following a particular region might simply have better intuition and public data than the average trader. In contrast, a federal employee with access to classified military plans or embargoed policy announcements would clearly be in a position to exploit material, nonpublic information. The lawmakers’ letter suggests that federal guidance must clearly spell out this distinction for government workers.
Another layer of complexity arises from the semi‑public nature of prediction markets themselves. Unusual spikes in volume or price can sometimes hint at information that has not yet become public. If a market suddenly moves strongly toward a specific geopolitical outcome, observers might infer that someone with inside knowledge is placing large bets. Regulators therefore worry not only about the fairness of the market, but also about the possibility that these instruments could inadvertently leak strategic information or influence diplomatic calculations.
Kalshi and Polymarket, as the most prominent players in this space, have said they are developing safeguards to reduce these risks. These can include tighter know‑your‑customer procedures, blacklists for certain categories of contracts, enhanced surveillance of trades around sensitive events, and cooperation with regulators when suspicious activity is detected. For markets that touch on national security or closely held government decisions, platforms may face growing pressure to either limit participation or refrain from listing those contracts altogether.
For federal employees, the emerging consensus is that caution is essential. Even if a platform is legally operating and a given contract is approved, using information gained through official duties to trade – or even appearing to do so – can undermine public trust. Ethics officers traditionally advise public officials to avoid any financial dealings that might create a perception of conflict of interest. With prediction markets entering the mainstream, many agencies may need to update training materials and internal rules to explicitly address this new asset class.
The lawmakers’ request for executive‑branch‑wide guidance hints at an expectation that OGE and CFTC will collaborate on a clear, accessible statement: prediction market contracts are covered by the same ethical and legal restrictions as other financial instruments, and federal employees must abstain from trading on nonpublic government information, regardless of how innovative or novel the platform may appear.
In the longer term, the debate over prediction markets and insider trading is likely to shape how these platforms evolve in the United States. Depending on how forcefully regulators act, event‑based derivatives could be confined to relatively innocuous topics, such as weather or macroeconomic statistics, or they could remain a venue for politically and geopolitically sensitive bets under strict oversight. The outcome will affect not only traders and platform operators, but also how policymakers and the public interpret the predictive signals these markets generate.
For now, the message from congressional Democrats is unambiguous: as prediction markets become more visible and more tightly integrated into the broader financial system, federal employees must be reminded that their first duty is to the public interest, not to personal profit from insider knowledge – whether that profit is made through traditional securities or cutting‑edge event contracts.