People are betting on elections. Congress is watching

WASHINGTON— As Spencer Pratt trails in the Los Angeles mayoral primary, an unlikely group has begun making claims of election fraud: People who track Republican success on prediction markets, increasingly popular online exchanges where people can bet on almost anything.

“It’s crazy how much voter fraud can happen through mail-in ballots,” a user who tracks betting on the mayoral race wrote last week on Kalshi, a top trading platform.

“Same old California scam,” said another who bet Pratt would win.

Claims of election fraud also spread to social media, where a handful of influencers who post content for prediction marketplace platforms questioned the vote count. “There is total pressure on Kalshi,” one user wrote on social media. “Is CA cheating to get Spencer Pratt out?”

Kalshi told influencers to delete posts that violate company rules. Another leading platform, Polymarket, ordered the removal of the paid affiliate tag from these posts.

The rise of election misinformation by users placing money on the mayoral race adds a new dimension to the evolving scrutiny of prediction markets, and scholars say the ability to bet on elections raises questions generally about whether these exchanges could change the way Americans participate in democracy.

“Elections are not a game,” said Davina Hurt, director of government ethics at Santa Clara University’s Markkula Center for Applied Ethics. “[If market] possibilities begin to influence donor decisions, media attention, and environmental energy [campaign] volunteers; At this point, markets are not just observing the election. They are part of it.”

Fans of the exchanges say they are powerful tools that can help decision-makers, and company leaders say they are highly accurate forecasters that can serve as an antidote to misinformation and provide election insights.

“By shifting the focus from ‘what people say’ to ‘where they put their money’ and filtering out social media noise and expert bias, we provide an unprecedented level of clarity and predictive power,” said Kalshi spokesperson Dani Lever.

But the meteoric rise of these markets has also raised a number of questions among members of Congress, state lawmakers and others about betting on elections, wars and other political events, potential insider trading and whether the platforms should be left to self-regulate. Some states are also engaged in legal battles with the federal government over whether the activity they are trying to regulate constitutes gambling.

“It’s like we’re in the 1930s with financial markets; there are certain things we want to regulate and restrict [as a country]”We’re in the early stages of trying to figure out what the rules are,” said Koleman Strumpf, an economist at Wake Forest University.

Concerns about insider trading

The discourse around the Los Angeles mayoral race is the latest to raise questions at the intersection of prediction markets and politics. Earlier this year, an Army soldier He was indicted for allegedly using his knowledge of a planned US operation to capture former Venezuelan leader Nicolas Maduro to make more than $400,000 by betting on it. HE begged not guilty.

During the same period, several anonymous users reportedly earned a total of $2.4 million. extremely forward-thinking bets This situation with the Iran war raised concerns in Congress about insider trading. And during the primaries, Kalshi fined several politicians. bet on yourselfWhen the Ministry of Justice took office to research a former congressman indicted on similar charges.

The episodes sparked a debate in Washington. The Republican-led House Oversight Committee has launched an investigation into potential insider trading, and a bipartisan group in Congress has introduced a series of bills aimed at putting guardrails in place. It is not yet clear whether it will pass this session.

Conversations in Congress led the Commodity Futures Trading Commission, which regulates prediction markets, to propose a new framework last week to govern issues raised by lawmakers, such as potential bets on wars. Commission Chairman Mike Selig said the proposal would “allow legitimate markets to proceed in the public interest” while allowing investigation of suspicious activity.

The markets commission under former President Biden was somewhat skeptical of prediction markets; The agency under President Trump, whose eldest son holds consulting positions at both Polymarket and Kalshi, is viewed more favorably for the industry. The federal government has sued several states over their attempts to regulate markets under state laws banning sports gambling and other measures.

Sen. Adam Schiff (D-Calif.), who authored the legislation on the issue, said the agency’s framework would benefit the industry at the expense of the public interest.

Schiff said the agency “lacks the leadership, will and investigative staff needed to confront dangers like election misinformation, insider trading and more,” and “seems content to let the industry police itself.”

don’t bet

As the California primary elections approached, people invested large amounts of dollars into races in the state. In Kalshi, transaction volume for a contract on who will win the Los Angeles mayoral race in November rose to more than $117 million as of Tuesday.

Prediction market users trade on the outcomes of future events, making money if they are right, losing money if they are wrong. Someone could buy a yes contract on the prediction that Los Angeles Mayor Karen Bass will win in November, or a no contract on the prediction that she will lose.

On Tuesday, Bass contracts on Kalshi were selling for 63 cents each for yes and 38 cents each for no, meaning the market was guessing 63% chance of winning. If their predictions are correct, users receive $1 per contract, making a profit on their initial investment.

Prediction markets generally create more accurate predictions than political polls, according to Strumpf, whose research examines 30 years of prediction markets in various ways.

Many of the problems raised by critics are theoretical and not seen in practice, Strumpf said. According to his analysis, there is no evidence that markets influenced the election outcome. He said serious investors tend to do extensive research to make money, meaning their bets are informed.

Rep. Mike Levin (D-San Juan Capistrano), who introduced legislation banning activity conventions involving terrorism, war, assassinations and deaths, said the platforms can be useful in some situations but should not be left to the control of the police. He said he was concerned that markets were creating “completely false incentives” for people, including political candidates and officials, to misuse inside information.

“I have absolutely no confidence in them regulating themselves,” Levin said of the companies. “The federal role must have reasonable and pragmatic guardrails.”

‘The sanctity of our choices’

Skeptics’ concerns about elections largely center around markets offering a new way for money to potentially influence politics.

They say the desire to improve a candidate’s market chances could create incentives for market manipulation, and they worry that the votes of Americans who use the market could be swayed by their desire to make a profit.

“This has real implications for the sanctity of our elections,” said Assemblywoman Maggy Krell (D-Sacramento), who expressed concerns about how prediction markets could impact the democratic process in a March letter to the state’s Fair Political Practices Commission. (A spokesman for House Speaker Robert Rivas (D-Hollister) said California lawmakers are studying the issue, but none of the bills introduced this year have yet moved forward.)

Krell said the platforms create a potential new channel “for dark money to flow into our elections.” “Specifically, someone opposing or supporting a candidate could potentially use sites like Kalshi to elevate that candidate and influence the entire pool.”

The industry is trying to “get ahead” of concerns by creating its own policies aimed at preventing insider trading, market manipulation and other problems, said attorney Ronak D. Desai, a partner at the Washington law firm Paul Hastings and chairman of its congressional practice.

Kalshi banned these practices and markets directly linked to death and war, Lever said. It also screens all new users and blocked more than 100 cases of potential insider trading and referred more than 20 cases to law enforcement in the first quarter of this year.

In the case of the military member who bet on the U.S. operation in Venezuela, for example, Polymarket caught that activity and referred the case to the Department of Justice, a spokesman said. He said the company referred nearly 100 cases of suspicious activity to law enforcement..

Polymarket’s US exchange does not offer selection markets; but it is widely reported that users in the US and other countries have banned the company’s international exchange to reach it using online tools.

“Polymarket prohibits trading based on stolen information, illegal leads or information obtained in breach of fiduciary duty, confidentiality or other legal obligations,” a Polymarket spokesperson said in a statement.

Aaron Klein, a senior fellow at the Brookings Institution’s Center on Regulation and Markets, predicted that pressure for more regulation will continue to grow.

“The most important goal of a society is free and fair elections,” Klein said. “At a time in our nation’s history when people doubt the integrity of elections and foreign governments are fanning those flames, we must be extremely careful.”