The regulatory environment for prediction markets in the US is currently under intense scrutiny following a series of high-volume trades concerning military actions in the Middle East.
The main issue of concern is the death of Iran’s former Supreme Leader, Ali Khamenei. The event saw intense trading on platforms that allowed users to engage in trading on geopolitical events.
These developments have sparked an array of discussions among legislators on the ethics and laws of such trading, especially with respect to active warfare and deadly operations.
On 2 March, Kalshi Co-founder and CEO Tarek Mansour addressed the controversy regarding the company’s policy on trading contracts concerning the potential death of public figures.
Mansour stated in an X post that the company does not list markets directly tied to mortality. In instances where a death occurs, the firm applies specific rules to prevent users from profiting from that specific outcome.
He argued that while traditional markets like oil futures often act as proxies for war, US-regulated entities are prohibited from hosting markets that settle directly on an individual’s death.
The specific Kalshi market focused on whether Khamenei would remain in power, a variable with substantial implications for global security and commodity prices.
However, Kalshi’s position is that since it does not offer mortality-related markets, a person’s death cannot be considered an action to determine a market on that individual’s removal from power.
No ‘death carveout’
Mansour defended the existence of the market by noting that leadership transitions in autocratic regimes can occur through resignation or displacement rather than death, citing recent events in Venezuela as a precedent.
Despite these justifications, the platform faced criticism regarding how it communicated these “death carveouts” to its users.
To address the fallout, Kalshi implemented a series of financial adjustments for those holding positions. The exchange settled the market based on the last-traded price recorded before the time of death.
For users who entered positions after the event at a higher cost, the firm reimbursed the difference. Furthermore, Kalshi waived and returned all transaction fees associated with the market to every participant.
This move was followed by a wave of user complaints, with some traders expressing frustration over the lack of full payouts for what they considered winning bets.
One Kalshi user stated: “This is a DISGRACE…you literally just said, we would not lose from winning…and you didn’t even have the decency to reimburse us for what we put into a bet that we WON?”
That individual had paid $470.09, but only received $110.64, for a loss of $359.45.
Kalshi not alone
The controversy extends beyond Kalshi to other platforms such as Polymarket.
As reported by NPR, an account operating under the name “Magamyman” reportedly earned more than $553,000 on Polymarket by betting that Khamenei would be out of power shortly before he was killed.
Such trades have drawn the attention of members of Congress who suggest the platforms may be used by individuals with access to classified information.
Data shows that users traded $500m on Polymarket regarding the specific timing of US military strikes in Iran.
The White House has issued a denial regarding allegations that individuals close to the administration were involved in these trades.
However, institutional ties persist, as Donald Trump Jr. serves as an advisor to Polymarket. His venture capital firm, 1789 Capital, previously invested millions of dollars into the business.
These connections have intensified calls for more stringent oversight of how prediction markets interact with sensitive national security data.
Precedents for these concerns appeared earlier this year. In January, an anonymous trader gained hundreds of thousands of dollars through well-timed bets placed prior to the arrest of Venezuelan leader Nicolas Maduro.
Furthermore, Israeli authorities charged two individuals with a crime in February for allegedly using classified information to trade on Polymarket during a conflict with Iran in June.
These cases indicate a pattern of suspected cases of insider trading on platforms not directly regulated by US commodity regulators, which makes the issue of the legality of geopolitical wagering even more complicated.