Lawmakers target prediction markets after users allegedly profited from Iran strike bets

U.S. lawmakers and state regulators are escalating efforts to restrict prediction markets after allegations that traders profited from bets on geopolitical events, including a purported Iran strike, while federal regulators struggle to assert jurisdiction over a rapidly growing sector caught between fintech innovation and gambling law.

At the heart of the controversy is a newly formed advocacy group, Gambling Is Not Investing, led by former U.S. Representative Mick Mulvaney (R-S.C.), who argues that many prediction markets function more like unregulated sportsbooks and should be subject to strict state gaming laws.

“These platforms are blurring the line between investing and gambling.” – Mulvaney said in a statement to Coingape.

He was asserting that prediction markets are operating in jurisdictions where traditional sports betting is still restricted.

The stakes are high: some platforms allow contracts on geopolitical events, political outcomes and sensitive situations that critics say are ethically problematic.

Recent allegations that certain users profited from bets tied to a U.S. strike on Iran have amplified calls for reform.

Federal vs state regulation: a legal tug-of-war

At the federal level, the Commodity Futures Trading Commission (CFTC) treats these offerings as derivatives subject to its oversight, maintaining that platforms like Kalshi and Polymarket fall under the Commodity Exchange Act.

However, multiple states are challenging that federal preemption. Connecticut, Massachusetts and Nevada have issued cease-and-desist orders or temporary suspensions, asserting that prediction markets operate as unlicensed gambling under state law.

In response, some lawmakers are moving beyond advocacy and toward legislation. Connecticut regulators and U.S. Senator Chris Murphy (D-Conn.) have indicated plans to draft bills that would ban certain types of bets.

Murphy told the New York Post that its insane that this process is legal, highlighting cases where alleged insiders reaped large profits on event-based contracts.

Meanwhile, a bipartisan group of industry supporters, including Robinhood, Crypto.com and Coinbase, has formed the Coalition for Prediction Markets to advocate for federal regulatory clarity and to counter state crackdowns.

Ethical, legal and consumer concerns intensify

Critics argue prediction markets pose ethical and consumer risks that extend beyond classic financial trading.

State attorneys general have warned that many contracts effectively replicate sports betting and other forms of gambling without the consumer protections traditional sportsbooks must offer.

Tribal leaders and gambling associations have also raised concerns about sovereignty and the impact on regulated gaming economies, urging Congress to intervene to protect tribal jurisdictions.

Insider trading concerns have further catalyzed scrutiny. Independent market analytics and news outlets note instances where newly created accounts made perfectly timed bets on geopolitical outcomes.

Consumer advocates say these dynamics underscore a broader flaw: many prediction markets operate without robust safeguards against exploitation.

Industry responses and what’s next

The industry’s defenders insist that prediction markets serve legitimate financial and informational purposes.

But as regulatory pressure mounts, major platforms are tightening internal compliance. Kalshi has publicly suspended users for insider trading violations and reported such cases to the CFTC, marking a rare enforcement step in the sector.

Despite this, legal uncertainty persists. Kalshi is pursuing litigation against Utah officials in a bid to clarify jurisdictional authority, arguing that state crackdowns threaten its federally regulated status.

As debate intensifies on Capitol Hill and in state capitals, prediction markets serve as a broader test case at the intersection of fintech innovation, gambling law and consumer protection.

With policymakers, regulators and industry stakeholders still at odds over classification and oversight, the future of prediction markets remains unsettled, and closely watched by investors, gamblers and regulators alike.