Democratic lawmakers urge CFTC to curb insider trading and limit event contracts in prediction markets

A group of Democratic lawmakers has asked the Commodity Futures Trading Commission (CFTC) to introduce rules targeting insider trading and restrict event contracts tied to elections, military activity, government actions, and sports.

In a letter, lawmakers led by Jeff Merkley of Oregon called on the regulator to address what they described as “the rapid erosion of integrity” in prediction markets, including Kalshi and Polymarket.

“We strongly encourage you to use your authority to preserve the intent of prediction markets, and congressional intent behind the Commodity Exchange Act, by issuing a rule that prevents insider trading and corruption in the market and prohibits event contracts on the outcome of elections, war and military actions in the US or abroad, sports, and government actions without a valid economic hedging interest,” the lawmakers wrote.

The letter was also signed by Richard Blumenthal of Connecticut, Chris Van Hollen of Maryland, Sheldon Whitehouse of Rhode Island, and Rep. Jamie Raskin of Maryland.

Rising activity draws regulatory attention

Prediction markets have gained traction over the past year, allowing users to place wagers on outcomes ranging from politics to entertainment and sports. The sector has drawn scrutiny following several high-profile cases.

Authorities last week arrested a US soldier accused of placing bets on Polymarket ahead of military action in Venezuela, generating $400,000. Separately, Kalshi suspended and fined three political candidates for allegedly trading on their own campaigns.

Lawmakers have introduced multiple bills this year addressing insider trading and restricting event contracts. One proposal led by Merkley would bar certain government officials from using prediction markets, while another would prohibit contracts tied to elections, war, and sports.

Election-linked contracts face scrutiny

The lawmakers’ letter stated that contracts tied to election outcomes “pose a danger to our democracy and elections.”

“These types of contracts did not exist before 2024 in the United States and for good reason,” they wrote. “Election-related prediction contracts create a financial incentive for political insiders involved in elections to subvert the will of American voters by altering their behavior.”

Sports contracts dominate volumes

Sports-related contracts account for the majority of trading activity on some platforms. According to the Congressional Research Service, sports made up nearly 90% of bets on Kalshi in the year ending February. On Polymarket, the category represented 38% of contracts.

The segment has drawn opposition from state regulators and casino operators, who argue that such contracts fall under gambling oversight.

“Event contracts on the outcome of a sports game or event are far from the intent of the CFTC’s mission. They are one of the most egregious examples of how these contracts represent gambling and violate states’ rights to regulate this activity,” the lawmakers wrote.

Rulemaking process advances at federal level

The Commodity Futures Trading Commission launched a public consultation in March as part of its rulemaking process, with the comment period closing Thursday.

“Today’s action is an important step in the Commission’s continued effort to promote responsible innovation in our derivatives markets,” CFTC Chair Michael Selig said in a statement. “This begins the process of new rulemaking grounded in a rational and coherent interpretation of the Commodity Exchange Act, while reassuring the American people that the CFTC will exercise its exclusive jurisdiction over prediction markets.”

Federal and state oversight tensions continue

The rulemaking comes as the agency contests efforts by several states to regulate prediction markets. The CFTC has filed legal actions against states that issued cease-and-desist orders, arguing that oversight falls under federal jurisdiction.

In April, a federal appeals court ruled that regulators in New Jersey could not prevent the use of Kalshi for sports-related contracts.