The proposition sold to Wall Street investors and Washington regulators was ambitious: prediction markets, where users bet on real-world events, produce faster, more accurate information than any alternative. As US and Israeli bombs fell on Iran, that theory was subjected to a brutal, real-world stress test. The industry, which has spent years courting legitimacy, saw its core value proposition collide with the moral and legal hazards of profiting from war.
The capital at stake is not trivial. Polymarket, backed by investors including the New York Stock Exchange’s parent company Intercontinental Exchange Inc., operates offshore with a valuation nearing $9 billion. Kalshi Inc., regulated by the U.S. Commodity Futures Trading Commission (CFTC), holds an $11 billion valuation and a deal with Tradeweb Markets Inc. Together, these platforms processed tens of billions in volume last year. Both enabled traders to bet on events in Iran, and when Ayatollah Ali Khamenei was killed in the strikes, both faced immediate and severe backlash.
On Polymarket, contracts tied to the timing of U.S. strikes drew over $529 million in volume. Blockchain analysts flagged suspicious betting patterns, particularly from newly created accounts. One account under the username “Magamyman” reportedly netted over $553,000 by correctly betting on Khamenei being out of power just before the lethal strike. This single trade became a focal point for lawmakers. It was, for many, the materialization of a long-held fear. Insider trading in broad daylight.
The Divergence of Regulation
Kalshi attempted a more delicate approach. Its Khamenei contract, which attracted over $50 million, included a critical carveout: if he died, positions would resolve at the last-traded price before his demise, not as a binary win. The platform maintains it does not offer markets that settle on death, as U.S. regulations widely prohibit contracts tied to war, terrorism, or assassination. The design was meant to thread a legal needle.
It failed. Money continued to flow into the market even as reports of Khamenei’s death circulated. Kalshi promoted the contract on social media, issued clarifications, and then halted trading. The fallout was swift. In an attempt at damage control, the company’s CEO pledged to reimburse all fees. Kalshi ultimately went further, reimbursing users’ net losses at a cost of approximately $2.2 million. A spokesperson stated, “Our rules were clear from the beginning… We reimbursed all fees and net losses because we thought the UX could have been clearer for users.” (A distinction lost on many irate traders).
This episode revealed a chasm that neither contract design nor existing regulation has managed to close. How can a platform allow betting on geopolitics without enabling the precise ethical breaches the rules were designed to prevent? The answer, it seems, is that it cannot.
Information Versus Incentive
The core argument from proponents is one of informational value. A liquid market, they contend, generates faster, more accurate signals than traditional intelligence. A shipping company navigating the Strait of Hormuz or an oil trader exposed to supply risk could theoretically use these contracts to hedge exposure. Kalshi CEO Tarek Mansour argued the Khamenei market served this purpose, noting leadership changes have vast consequences for global markets, and that autocratic leaders can leave power without dying. (The recent ouster of Venezuela’s Nicolás Maduro serves as a case in point).
Critics counter that markets based on violence create fundamentally different incentives than those based on elections or economic data. The potential for abuse by those with classified military or state intelligence is acute. This is no longer a hypothetical. In February, Israeli authorities filed what appear to be the first criminal charges linking prediction market bets to classified military intelligence. The profit motive becomes directly attached to lethal outcomes.
“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,” stated Better Markets CEO Dennis Kelleher. Amanda Fischer, a former SEC chief of staff, was more direct, stating the confusion over the resolution “underscores that this betting market shouldn’t exist in the first place.”
Political and Regulatory Fallout
The timing could not have been worse for the industry. Less than a week before the strikes, Democratic senators led by Adam Schiff sent a letter to the CFTC demanding a crackdown on contracts tied to war and assassination. Following the events, Senator Chris Murphy of Connecticut announced he was drafting legislation to ban what he called “corrupt and destabilizing prediction markets.” He minced no words. “It’s insane this is legal,” he wrote on X. “People… are profiting off war and death.”
Even the industry’s own trade group, the Coalition for Prediction Markets, of which Kalshi is a member, stated days before the strikes that “contracts involving death have no place on American exchanges.” Days later, one of its most prominent members was forced to invalidate a contract precisely because its subject was killed. The statement now reads as either profoundly naive or deeply cynical.
Complicating the political landscape are Polymarket’s connections. Donald Trump Jr. serves as an adviser, and his venture capital firm has invested in the platform. The Trump administration previously dropped two federal investigations into the company. These ties ensure the debate will not remain confined to regulatory agencies but will be fought in the political arena.
The strikes on Iran were the ultimate test. They stripped away the industry’s rhetoric about information discovery and hedging, exposing the raw mechanism underneath: a financial incentive tied to human conflict. For regulators, the challenge is now clear. The question is not whether a line should be drawn, but where, and how forcefully. The market has delivered its signal. Washington is now expected to respond.