Can I bet on a prediction market on whether the U.S. will bomb Iran before a specified date? Or, can I similarly bet there on whether the Ayatollah will be ousted from office (including as the result of his death or even assassination) before a given date? Many have been surprised to learn that on one offshore platform, Polymarket (which is not regulated by the Commodity Futures Trading Commission (“CFTC”)), at least six traders apparently made more than $1 million in profits by betting that the U.S. or Israel would strike Iran by February 28, 2026. This looks like classic insider trading, except for the fact that no security was involved.
Still, the combination of the Commodity Exchange Act and CFTC Rule 40.11 (“Review of event contracts based upon certain excluded commodities”) gives the CFTC authority to prohibit event contracts that “involve, relate to, or reference assassination or war” or certain other illegal activities. This is known as the “TAWGA” exception to those who deal in event contracts (the acronym stands for “Terrorism, Assassination, War, Gaming and Illegal Activities”), but its wording is far from air tight. For example, one well-known inhabitant of the White House denies that there is any “war” pending in Iran. After all, Congress never declared war. Also, although the CFTC is given statutory authority, it needs to exercise it by adopting clearer rules and enforcing them. Enforcement is not what the CFTC likes to do.
This problem is not hypothetical. For example, on Kalshi (which is a CFTC-regulated platform), traders bet whether the Ayatollah Khamenei would no longer be Iran’s Supreme Leader by February 28, 2026. This shocked many for different reasons. Some were dismayed by the U.S.’ involvement in assassinating foreign leaders; probably even more were repelled by the fact that persons with close connections to our highest leaders apparently made obscene profits trading on state secrets. Similarly, intelligence agencies are aghast because such trading could tip our adversaries as to our plans.
There is little question that the CFTC has the authority to act. Not only does Rule 40.11 enable it to prohibit TAWGA-related event contracts, but another section of Rule 40.11 enables it to bar by a rule or regulation “an activity that is similar to” TAWGA activities. But the CFTC must act and adopt such a rule or regulation. That has been a long-standing problem with the CFTC. Prediction markets are within the CFTC’s jurisdiction, not the SEC’s, but the CFTC does not seem to date to have brought any enforcement case involving prediction markets.
Congress has noted this. Several senators have recently written the CFTC’s chair, and in early March, two Congressmen – Blake Moore (R-Utah) and Salud Carbajal (D-Calif.) – have introduced a new statute, “The Event Contract Enforcement Act,” which would require (and not simply permit) the CFTC to prohibit event contracts that involve or relate to TAWGA activities. Possibly, such bipartisan legislation will work, but there are issues on which the states are divided (most notably, whether sports gambling should be permitted on prediction markets).
The simplest solution would be if the CFTC would show some backbone and adopt clearer rules against anything resembling or similar to trading on TAWGA events.
Here, as usual, an issue arises as to what should be the scope of this insider trading prohibition. Under Dirks v. SEC, 463 U.S. 646 (1983), the prosecutor must show some breach of a fiduciary (or similar) duty. That may be the right answer in securities cases (where the Supreme Court has always been motivated by the need to preserve a free flow of information and has resisted any “parity of information” standard). Still, in cases involving an approaching war, assassination, terrorism, or other clearly illegal activity, it is far less clear that the Dirks standard should limit prosecutors. Effectively, Dirks requires the prosecutor to show some personal benefit paid by the tippee to the tipper. This can be difficult to show in many cases. As a result, prosecutors convinced Congress when it enacted the Sarbanes-Oxley Act in 2002 to give it a simplified insider trading statute — 18 U.S.C. §1348, which applies to both securities and commodities and seemingly eliminates much (and maybe all) of the Dirks test. Given the current combination of moral outrage, political danger, and national security risks associated with event contracts in prediction markets, a simpler rule that does not require proof of a fiduciary breach or a personal benefit to the tipper makes considerable sense.[1]
ENDNOTE
[1] Besides §1348, prosecutors could also use the federal mail and wire fraud statutes. See Carpenter v. United States, 484 U.S. 19 (1987). These statutes would be applicable if the trader used confidential business information that it learned from his or her employer. The SEC cannot use §1348 or mail and wire fraud, as it is limited to statutes set forth in Title 15 and has no authority over commodities.
John C. Coffee, Jr. is the Adolf A. Berle Professor of Law at Columbia University Law School and Director of its Center on Corporate Governance.