Several U.S. senators are making a legislative effort to ban government officials from trading on prediction markets amid a series of insider trading controversies.
Sens. Amy Klobuchar and Jeff Merkley have introduced the End Prediction Market Corruption Act, legislation that aims to prevent government officials from leveraging their access to insider information to trade on prediction markets. The bill has three additional co-sponsors: Sens. Chris Van Hollen, Adam Schiff and Kirsten Gillibrand.
“When public officials use non-public information to win a bet, you have the perfect recipe to undermine the public’s belief that government officials are working for the public good, not for their own personal profits,” said Merkley in a press release. “Perfectly timed bets on prediction markets have the unmistakable stench of corruption.”
The ban on event contract trading by government officials would extend to the U.S. President, Vice Presidents, members of Congress and other public officials. The penalty for violating the measure’s standards for prediction markets would be a civil penalty of at least $10,000 for each violation, levied by the U.S. Attorney General.
Why did the lawmakers introduce this bill?
The bill comes amid several recent geopolitical controversies tied to event contracts.
Earlier this year, a trader on Polymarket’s global platform pocketed more than $400,000 on the political status of Venezuelan President Nicolás Maduro before his arrest by U.S. federal authorities, raising concerns about the potential use of insider knowledge.
Earlier this week, more insider trading concerns were raised after another Polymarket trader made over $553,000 on markets related to Iran and its leadership. The trading drew the attention of lawmakers, leading to speculation about the use of insider information.
A group of traders also pocketed $1.2m from trading on Iran strikes before they occurred.
Merkley and Klobuchar note CFTC’s regulatory authority
The lawmakers acknowledge the Commodity Futures Trading Commission’s (CFTC) regulatory authority over prediction markets in their attempt to thwart insider trading.
“At the same time that prediction markets have seen huge growth, we have seen increasing reports of misconduct,” said Klobuchar. “This legislation strengthens the Commodity Futures Trading Commission’s ability to go after bad actors and provides rules of the road to prevent those with confidential government or policy information from exploiting their access for financial gain.”
Merkley and Klobuchar’s measure provides the CFTC with the right to investigate potential prediction market insider trading violations.
Organizations that also back the bill include Citizens for Responsibility and Ethics in Washington and Washington, D.C.-based non-profit Project on Government Oversight.
Other prediction market insider trading bills
Other bills have already been filed looking to prevent insider trading on prediction markets.
New York Rep. Ritchie Torres introduced the Public Integrity in Financial Prediction Markets Act in January, proposing to ban federal elected officials, political appointees, and executive branch employees from trading event contracts related to government policy, government action, or any political outcome.
Torres introduced the bill following the controversy related to the Polymarket trading on Maduro. It was referred to the House Committee on Oversight and Government Reform, but has failed to progress since then.
Fellow New York lawmaker Assemblymember Clyde Vanel has also introduced a state bill that would amend state law to prohibit prediction markets from offering markets on “catastrophic events, politics, deaths and athletic events.” The legislation also limits event contract trading to New Yorkers 21 and older.
Tennessee is also getting in on the action with Sen. Ferrell Haile filing Senate Bill 1992, a bill that penalizes anyone “who engages in conduct intended to influence the outcome of an event while the person or another is a party to a contract with a prediction-market by which the person will benefit, directly or indirectly, from the occurrence of the outcome.” The penalty is a Class E felony, which subjects a violator to a prison term that ranges between one and six years.
