Prediction market activity has skyrocketed, with traders increasingly flocking to contracts tied to the escalating US-Iran conflict, a surge that coincides with Washington’s aggressive moves towards clearer federal rules for event contracts and a legislative push to explicitly ban markets linked to war, terrorism, and death. This confluence of geopolitical tension, unprecedented market growth, and intense regulatory scrutiny marks a pivotal moment for the nascent prediction market industry, forcing a re-evaluation of its role at the intersection of finance, information, and ethics.

The digital battlegrounds of Polymarket and Kalshi have witnessed notional trading volumes soar to new all-time highs. During the week ending Monday, March 9, Polymarket’s volume reached an astounding $2.49 billion, while Kalshi recorded an even higher $2.85 billion, according to Token Terminal data. This explosive growth isn’t isolated; it reflects a broader trend, pushing the total notional volume across all prediction markets to an eye-watering $145 billion, distributed among 2.8 million unique users, as detailed by data from Dune. The dramatic uptick underscores the growing appeal of these platforms as mechanisms for individuals to bet on, or "price in," future events, even those with profound humanitarian implications.

At their core, prediction markets are exchanges where users can trade contracts based on the outcome of future events. These "event contracts" function similarly to traditional financial derivatives, but instead of commodities or stocks, they derive their value from real-world occurrences – from political elections and economic indicators to, controversially, geopolitical conflicts. Proponents argue that these markets aggregate dispersed information, potentially offering a more accurate forecast of outcomes than polls or expert opinions. However, critics, especially in the context of war and death, contend that they venture into morally perilous territory, effectively commodifying human suffering and creating incentives that are deeply unsettling.

The surge in activity, particularly around sensitive geopolitical events, has not gone unnoticed by US regulators. The Commodity Futures Trading Commission (CFTC), the primary federal agency responsible for overseeing the derivatives markets, is at the forefront of this regulatory push. The agency recently issued a staff advisory classifying event contracts on prediction markets as a “financial asset class.” This designation is far from semantic; it signals the CFTC’s intent to assert its jurisdiction over these platforms, treating them with the same regulatory rigor applied to traditional futures and options markets.

Further solidifying its stance, the CFTC submitted an Advanced Notice of Proposed Rulemaking (ANPRM), actively seeking public feedback on how the Commodity Exchange Act (CEA) – the foundational law governing commodity futures and options – would apply to prediction markets. This move came weeks after CFTC Chair Michael Selig publicly reiterated claims that the CFTC possessed "exclusive jurisdiction" over prediction markets. Selig’s assertion reflects a desire to bring a fragmented and often nebulous market under a unified federal regulatory umbrella, aiming to foster market integrity, protect participants, and prevent illicit activities.

However, the CFTC’s claim to exclusive jurisdiction has faced immediate legal challenges. Just last Monday, an Ohio judge pushed back against this assertion in a significant ruling. The judge stated that Kalshi, a CFTC-regulated Designated Contract Market (DCM), had "failed to show the CEA would necessarily preempt Ohio’s sports gambling laws," or that these specific sports betting-like contracts would fall under the "exclusive jurisdiction" of the CFTC. This ruling introduces a layer of complexity, suggesting that state-level gambling laws might still apply to certain prediction market contracts, potentially creating a patchwork of regulations that could hinder the industry’s growth and create legal ambiguities for platforms operating across state lines.

Both Kalshi and Polymarket US are headquartered in New York, and their paths to regulatory compliance in the US illustrate the evolving landscape. Kalshi, for instance, operates as a Designated Contract Market (DCM) under CFTC oversight. Polymarket’s journey has been more turbulent. Its US entity, Polymarket US, has been operating under the CFTC since late 2025, a significant milestone achieved after acquiring CFTC-licensed exchange and clearinghouse QCX LLC for $112 million and subsequently rebranding. This acquisition was a strategic move to bring its US operations squarely within federal regulatory boundaries, even as Polymarket’s offshore platform continues to operate separately from its federally regulated US venue.

Polymarket’s past highlights the regulatory challenges faced by the industry. In January 2022, the CFTC charged Polymarket’s parent company, Blockratize, with illegally offering unregistered event-based options contracts. The company settled by paying $1.4 million in civil monetary penalties and agreeing to wind down its unlicensed operations before the aforementioned restructuring. This settlement underscored the CFTC’s determination to enforce existing regulations. The subsequent Amended Order of Designation issued by the CFTC in November 2025 for Polymarket US, which vacated prior restrictions and authorized trading as a DCM, marked a turning point, signaling a path for prediction market operators to achieve legitimate, federally regulated status.

Amidst these regulatory maneuvers, a legislative hammer is poised to fall. On Tuesday, US Democratic Party Senator Adam Schiff introduced new legislation seeking to explicitly ban federally-regulated prediction markets from listing contracts tied to war, terrorism, assassination, and individual deaths. The proposed bill, aptly named the "DEATH BETS Act," aims to amend the CEA to include such a prohibition for entities overseen by the CFTC. Schiff’s initiative reflects a growing ethical backlash against the perceived commodification of human tragedy and violence.

The proposition for the DEATH BETS Act was directly fueled by renewed insider trading allegations that cast a shadow over the industry. Specifically, six Polymarket traders reportedly netted $1 million by accurately betting on a US strike against Iran, raising serious concerns about whether they possessed privileged information. These concerns were further amplified in February when Israeli authorities arrested and indicted two individuals suspected of using secret information about Israel’s own military strikes on Iran for insider trading on Polymarket. Such incidents not only undermine public trust but also provide powerful ammunition for critics who argue that these markets, especially when dealing with sensitive geopolitical or life-and-death events, are ripe for abuse and ethical compromises.

The data itself confirms the direct link between the conflict and market activity. Prediction market activity has been on a sharp upward trajectory since the beginning of the recent US and Israeli military conflict with Iran. "Politics-related" contracts, which encompass bets on geopolitical outcomes, have soared to become the third-largest category on Polymarket, commanding $598 million in notional trading volume. On Kalshi, this category ranked as the eighth-largest, with $16 million in notional trading volume last week, according to Dune data. This demonstrates a clear correlation between real-world events and the speculative fervor they ignite within these markets.

The intense debate surrounding prediction markets often boils down to a fundamental question: Are they valuable tools for information aggregation, or are they glorified gambling platforms that risk normalizing speculation on human suffering? Proponents argue that the collective intelligence of market participants can yield remarkably accurate predictions, which could theoretically be valuable for policymakers, businesses, and even intelligence agencies. However, the ethical quandary of profiting from acts of war or terrorism, or the potential for such markets to incentivize malevolent actions, remains a formidable challenge for the industry to overcome.

As the CFTC grapples with defining the regulatory framework and Congress considers outright bans on specific contract types, the future of prediction markets in the US hangs in the balance. The industry faces the daunting task of demonstrating its utility and integrity while navigating a landscape fraught with moral objections and jurisdictional complexities. The outcome of the CFTC’s rulemaking process and the fate of Senator Schiff’s DEATH BETS Act will profoundly shape whether these platforms can evolve into a legitimate, albeit highly regulated, segment of the financial market, or whether their most controversial applications will be permanently curtailed in the name of public morality and national security.