A proposed bill to limit insider trading on prediction markets by federal government figures may be the clearest sign yet of members of Congress raising concerns about the new vertical, but questions remain about its scope and potential enforcement.
The proposal — expected to be introduced by Rep. Ritchie Torres this week — was first reported by Punchbowl Monday, soon after a Polymarket user made trades worth hundreds of thousands dollars on Nicolas Maduro being removed from power less than 24 hours before he was captured by U.S. forces.
While the identity of the potential insider is not known, few people would have been aware of the operation before it took place. Other than figures within the federal government, the New York Times and Washington Post were reportedly aware of the operation before it happened.
A draft of the bill’s text was published Tuesday.
TORRNY_126_1.05_xmlBut will the potential legislation make a big difference to insider trading on prediction markets?
The bill’s scope is relatively limited. It applies to “an elected official of the Federal Government; a political appointee [or] an employee of an Executive agency.” That would mean it still wouldn’t apply to other individuals who might also have insider knowledge, but do not work directly for the federal government.
The potential bill also only covers trades related to a “government policy; government action; or political outcome,” with other forms of insider betting outside of its scope. Prediction market users have also noted potential insider trades from traders at companies such as Spotify and Google, whose data is the subject of event contract markets.
Who would enforce insider trading ban?
If the bill becomes law, which still appears some way away, authorities will have to determine how it would be enforced. The draft bill does not mention penalties for violating the law or other causes of action. It is also unclear whether any possible penalties would apply only to the individual making these trades or whether platforms that allow this activity could also be subject to punishments of their own.
Typically, a law would specify criminal penalties if it is to be enforced by the Department of Justice, but a regulator like the Commodity Futures Trading Commission (CFTC) would generally be granted enforcement powers.
The draft is still in its early stages, having not yet been submitted. It is possible that details of enforcement would be worked out at a later stage.
The bill would cover trades being “listed on or offered by a platform engaged in interstate commerce, and tied to the occurrence or non-occurrence of a future event, including market-based event contracts.” Whether this would apply to trades on Polymarket’s global site, which does not accept users with U.S.-based IP addresses, is arguably unclear.
Polymarket’s global site could prove challenging for enforcement. While user data is public, which has allowed for social media speculation about potential insider activity, the site’s crypto-based structure makes it more challenging to link a possibly suspicious account to an actual individual.
Crypto platforms that offer “tokenized predictions” linked to Kalshi contracts may be in a similar situation.
Meanwhile, contract purchases on Kalshi are anonymous, so while the platform itself could provide information on possible insider-trading activity from federal government figures to authorities, it may be more difficult for outsiders to spot patterns of activity from the same account.
CFTC’s narrow insider-trading rules
The incident is the latest that highlights challenges over insider trading in prediction markets.
All prediction markets registered with the CFTC include house rules that prohibit the use of “material non-public information” to trade. Kalshi highlighted that this was the case following the initial Punchbowl report, noting that the activity prohibited in the proposed bill would already violate its rules.
However, these are all house rules, with the CFTC’s own rules on insider trading being narrow by design. Trading with material non-public information is permitted by the regulator, as long as that information was obtained legally and the market isn’t being manipulated.
Some, including Coinbase Chief Executive Brian Armstrong, have argued that insider trading on prediction markets can be beneficial, in order to provide accurate probabilities for events.
Heightened attention on the Hill
The bill comes amid increasing attention from federal legislators toward prediction markets. Last month, the House Agriculture Committee met to discuss reauthorization of the CFTC – a largely ceremonial process – and some members raised concerns about prediction markets. During the meeting, Rep. Gabe Vasquez of New Mexico suggested tying any reauthorization to an amendment of the Commodity Exchange Act that would limit prediction markets’ abilities to offer bets on sports.
On Wednesday, Rep. Dina Titus of Nevada wrote on social media site X, “Prediction markets continue to prove that they are unreliable and promote unfair, discriminatory practices that are virtually unregulated.”
In September, a draft letter to the CFTC that questions why the regulator is allowing sports-related markets circulated on the Hill.
