In the wake of a pattern of suspicious trades on the ouster of Venezuelan leader Nicolas Maduro, a two-term US senator has expressed deep concerns to the nation’s derivatives regulator about the threat of insider trading on prediction markets.
Senator Catherine Cortez Masto, a Nevada Democrat, wrote a four-page letter on Sunday to the US Commodity Futures Trading Commission urging closer attention be paid to the anomalous patterns in the financial markets. At the start of the year, an anonymous trader on Polymarket made a $30,000 trade on the Venezuela president to be removed from power, hours before US military forces raided his compound in Caracas.
All told, the trader received a payout of roughly $436,000 for the Maduro-related transactions. While there is no definitive evidence that the individual received inside information before placing the trade, Cortez Masto wrote that the timing of the transaction does raise suspicions. Nearly a dozen other senators, all Democrats, joined Cortez Masto as signatories on the letter.
Polymarket US, a registered CFTC Designated Contract Market, has not fully launched in the United States. The five-figure Maduro trade apparently was placed outside the US. However, the Nevada senator still believes the trade raises concerns about the lack of safeguards on insider trading across those markets.
“This improbable increase in trades against Maduro’s continued authority in Venezuela mere hours before Maduro’s capture exemplifies the dangers of unregulated gaming,” Cortez Masto wrote.
National security issues
Cortez Masto has extensive experience in the legal world, having served as attorney general of Nevada from 2007 to 2015. She previously served as a federal prosecutor in Washington DC for two years and also spent four years in Las Vegas as a civil attorney and served as former Nevada Governor Bob Miller’s chief of staff.
Per CFTC Rule 40.11, event contracts on war, assassination and terrorism are prohibited if the contracts are deemed contrary to the public good. In the letter to CFTC Chairman Michael Selig, the senator articulated the national security concerns surrounding potential insider trading on the markets. If event contracts are manipulated by insider information, or merely listed, it is possible for foreign adversaries to use the information to their advantage, she added.
Beyond the Maduro contract, Polymarket has provided markets on a number of other major geopolitical issues. A series of contracts on whether the US military will strike Iran by 30 June has received at least $16.8 million in trading volume.
Another contract allows individuals to trade on whether a ceasefire between Iran and Israel will be broken. One option lets individuals take a side on whether the ceasefire will be shattered by 31 March. On Tuesday, the contract traded at 70 cents (a payout of $142.86 on a $100 contract).
Other prediction market implications
Separately, the American Gaming Association and the Indian Gaming Association sent a joint letter to Congress on Monday pertaining to prediction market regulation. The trade groups stated that congressional consideration of cryptocurrency market structure legislation provides a bipartisan opportunity to restrict what they see as illegal sports betting and casino gambling offered under the guise of “event contracts”. Furthermore, the groups urged Congress to include language in the cryptocurrency market structure legislation that prohibits gambling through CFTC-registered platforms.
Over the last year, no fewer than nine states have issued cease-and-desist orders telling Kalshi to stop providing its contracts in their jurisdictions. Last week, Tennessee sent cease-and-desist letters to Kalshi, Polymarket and Crypto.com demanding that they cease offering sports event contracts to customers statewide.
In response, Kalshi wrote that the state orders are preempted by the Commodity Exchange Act under the CFTC. The proliferation of event contracts has created an intense battle between advocates of states’ rights and those citing federal preemption in the regulation of the derivatives.
During his Senate confirmation hearing last November, Selig acknowledged it is vital for the CFTC to ensure that event contracts are not susceptible to manipulation. In her letter to Selig, Cortez Masto included a list of nine concerns related to the mitigation of insider trading. A CFTC spokesperson did not immediately respond to a request from iGB for comment.
Matt Rybaltowski
Matt is primarily responsible for long-form feature coverage on complex sports betting scandals. He also provides coverage on finance, M&A and other technological developments.
Senator Catherine Cortez Masto presses CFTC chair for protections against insider trading.