Representative Seth Moulton of Massachusetts attends a House Democratic Caucus meeting at the Capitol on Thursday, November 15, 2018.
Bill Clark | CQ Roll Call Group | Getty Images
In a letter sent late Monday, a group of House Democrats asked the Commodity Futures Trading Commission why it doesn’t police bets on war and other government actions through offshore prediction markets.
A letter to CFTC Chairman Michael Selig, first obtained by CNBC, questions the agency’s role in regulating prediction markets, which have recently surged in popularity and drawn the ire of a growing number of lawmakers.
“Recent high-profile cases of alleged insider trading on prediction market platforms related to U.S. government actions, such as the military intervention in Venezuela and the recent attack on Iran, have fueled concerns that the CFTC is not properly managing these fast-growing markets,” the group, led by Massachusetts Democrats Jim McGovern and Seth Moulton, wrote.
The ouster of Venezuelan President Nicolas Maduro and the timely bet by the United States and Israel against attacking Iran have raised concerns about possible insider trading. Popular prediction markets like Kalshi and Polymarket allow users to buy event contracts on things like who will win the NCAA Men’s Basketball National Championship or how long the Department of Homeland Security shutdown will last.
Kalsi is based in the United States, prohibits betting on controversial issues such as war, and says it is regulated by the CFTC. Although Polymarket is an offshore company, it has been the venue for several high-profile event deals, although its availability in the United States is limited. Both companies recently announced voluntary guardrails to curb insider trading on their platforms.
But House Democrats say more can be done to regulate even these offshore transactions. The CFTC’s internal rules and the Commodity Exchange Act allow the CFTC to regulate when “swap activity outside the United States has a direct and material connection with or affects U.S. commerce,” the lawmakers wrote.
“These provisions make clear that the CFTC has the authority to police insider trading in the swaps market and should apply existing rules prohibiting bets related to terrorism, assassination, and war,” the group wrote.
The CFTC and Polymarket did not immediately respond to requests for comment Tuesday.
Reps. Gabe Amo of Rhode Island, Greg Casar of Texas, Jamie Raskin of Maryland, Dana Titus of Nevada and Democratic Rep. Yasamin Ansari of Arizona also signed. They questioned why authorities had not previously taken public action against such bets and whether they felt they had the authority to regulate insider trading in prediction markets. And they asked whether the CFTC was aware of “conflicts of interest between major market participants and families of executive branch officials, including the President of the United States.”
Donald Trump Jr. is an investor in Polymarket, a strategic advisor to Kalsi, and an unpaid advisor to Polymarket. The Trump family’s social media company announced last year that it would launch its own prediction market platform called “Truth Predict.”
Lawmakers asked Selig to respond by April 15.
“Corrupt deals like this deserve swift and decisive oversight. Allowing these contracts to continue raises worrying concerns about the Commission’s willingness and ability to fulfill its global regulatory role,” they wrote.
Lawmakers have struggled with how to rein in prediction market platforms, introducing a flurry of bills in recent weeks and months. Some are specifically designed to address the threat of insider trading, while others take a broader approach and seek to prohibit specific types of event contracts, such as sports, government actions, and war.
Last month, Moulton announced a company-wide policy banning all use of prediction markets by staff. A group of Democratic senators sent another letter to Selig in February expressing concerns about event contracts that “encourage bodily injury or death.”
Selig, on the other hand, went after states seeking to regulate prediction markets, arguing that the power lies with the federal government. Last week, the CFTC sued Arizona, Illinois, and Connecticut, which issued cease-and-desist orders to prediction markets for violating gambling laws. On Monday, a federal appeals court in New Jersey ruled that gaming regulators cannot prohibit the use of calci to bet on sporting events.
“What we’re seeing is an attempt by the state gaming commission to effectively override federal law,” Selig told CNBC’s “Squawk Box” Monday before the New Jersey ruling was announced.
Disclosure: CNBC and Kalsi have a commercial relationship that includes a minority investment in CNBC.
