Iran Strikes Expose Dark Edge Case of Prediction-Market Era

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Iran Strikes Expose Dark Edge Case of Prediction-Market Era.

general :: 9hrs ago :: source - bloomberg

By Denitsa Tsekova

(Bloomberg) -- Prediction markets have spent the past year courting Wall Street money and Washington legitimacy with an ambitious pitch: markets that let people bet on real-world events can produce better, faster information than any alternative.

This weekend, as US and Israeli bombs fell on Iran and traders rushed to cash in, the war exposed just how morally and legally fraught that proposition can get.

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The industry has attracted serious money and serious backers. Polymarket, backed by investors including Intercontinental Exchange Inc., the parent of the New York Stock Exchange, has been valued at $9 billion and operates offshore, largely outside US regulatory oversight. Kalshi Inc., which is regulated by the Commodity Futures Trading Commission, has been valued at $11 billion and has struck a deal with Tradeweb Markets Inc. The platforms handled tens of billions in combined volume last year.

Both let traders bet on what would happen in Iran, and when Ayatollah Ali Khamenei was killed in the strikes Saturday, both drew backlash. On Polymarket, contracts tied to the timing of US strikes had drawn more than $529 million in volume, while blockchain analysts flagged suspicious betting patterns among newly created accounts. Its market tracking whether Khamenei would no longer be supreme leader resolved to ‘yes.’

Kalshi had tried to thread the needle. Its Khamenei contract, which had attracted more than $50 million in volume, had a carveout: if he died, positions would resolve at the last-traded price before his demise rather than paying out as a binary win. The platform says it does not offer markets that settle on death — and on regulated US exchanges, contracts tied to war, terrorism or assassination are widely seen as prohibited.

The carveout was quickly put to the test. More money poured into the market on Saturday, some of it while reports of Khamenei’s killing were already circulating. Kalshi highlighted the contract on social media that morning, issued clarifications, then halted trading later. By Saturday evening, its CEO took to social media, pledging to reimburse all fees from this market. In the end, Kalshi also reimbursed users’ net losses — a move that cost the company about $2.2 million, according to a person familiar with the matter.

The episode illustrated a gap that neither regulation nor contract design has managed to close: how to let people bet on geopolitical events without producing exactly the ethical issues the rules were written to prevent.

“Our rules were clear from the beginning, we never changed them, and we settled based on the rules,” a Kalshi spokesperson said. “We reimbursed all fees and net losses because we thought the UX could have been clearer for users.”

Polymarket didn’t immediately reply to a request for comment.

The fallout has forced into the open a debate the industry would prefer to have on its own terms. Advocates argue that geopolitical contracts produce genuine informational value — that a liquid market where traders put real money at stake generates faster, more accurate signals than traditional intelligence analysis or news coverage. Proponents also point to hedging: a shipping company routing through the Strait of Hormuz or an oil trader exposed to Middle East supply risk can use these contracts to manage exposure in ways conventional insurance cannot match at that speed.

Photographer: Kaveh Kazemi/Getty Images

Kalshi CEO Tarek Mansour has argued that the Khamenei market served a legitimate purpose, noting that leadership changes in Iran carry consequences for global oil prices, national security and the broader world order — and that autocratic leaders can leave power without dying, as happened with Venezuela’s Nicolás Maduro in January.

“We don’t list markets directly tied to death,” Mansour wrote on X. “When there are markets where potential outcomes involve death, we design the rules to prevent people from profiting from death.”

Critics counter that war markets create incentives fundamentally different from betting on elections or economic data. When the underlying event is violence, the potential for abuse is acute. In February, Israeli authorities filed what appear to be the first criminal charges anywhere in the world linking prediction market bets to classified military intelligence.

“These private, profit-maximizing financial firms want to have it both ways: maximizing trading on anything while narrowly interpreting a clear law that outlaws this trading on assassination and war,” said Better Markets CEO Dennis Kelleher in an email.

The backlash arrives at a pivotal moment. New business models have cropped up around the conviction that anything measurable should be tradable, from the length of a press conference to the outcome of a war. Prediction markets are the purest expression of that impulse: strip away the intermediaries, let the crowd set the price, and treat the resulting number as truth. The Iran bets tested whether that logic has a limit.

“Rig the Game”

Democratic senators led by Adam Schiff of California sent a letter to CFTC Chairman Michael Selig less than a week before the strikes demanding that the agency crack down on contracts tied to war and assassination. They set a March 9 deadline for a response, a date that now arrives against the backdrop of an actual war.

Senator Chris Murphy, a Connecticut Democrat, went further over the weekend, saying he is drafting legislation to ban what he called “corrupt and destabilizing prediction markets, where insiders who know the outcome, especially in government, can rig the game to favor certain bets.”

The industry’s own trade group, the Coalition for Prediction Markets — of which Kalshi is a member — responded on X to the senators’ letter by saying that “contracts involving death have no place on American exchanges.” Days later, one of its members had to effectively halt a contract because its subject was killed.

“The confusion and outcry over how the wagers would resolve underscores that this betting market shouldn’t exist in the first place,” said Amanda Fischer, a former chief of staff at the Securities and Exchange Commission.

In a late Sunday night post on X, Kalshi’s Mansour said the exchange had “learned a lot” from its Khamenei market. Future markets where death is a possible scenario will be presented differently, he added, with the carveout highlighted clearly to investors before they trade.

--With assistance from Emily Nicolle.

(Updates with Kalshi CEO comment in final paragraph.)