- New U.S. defense proposal would bar military personnel from prediction trades using nonpublic data.
- The measure follows insider trading allegations tied to a soldier’s bet on the Maduro operation.
- Regulators tighten scrutiny as prediction markets face insider trading risks.
A new U.S. defense policy proposal moves to bar military personnel and Pentagon civilian employees from participating in prediction markets when they possess nonpublic information. The measure seeks to address insider trading concerns in the growing sector.
The provision is included in draft legislation released by the House Armed Services Committee. It comes months after a U.S. special forces soldier was accused of using classified information to place bets on a prediction market tied to the capture of Venezuelan President Nicolás Maduro.
Pentagon Introduces New Restrictions
Under the proposed measure, Defense Secretary Pete Hegseth would be required to establish regulations that prevent military members and Pentagon civilian staff from trading in prediction markets when they possess relevant nonpublic information.
The restrictions also apply when individuals could reasonably obtain such information through their positions. The proposal requires the Pentagon to create a range of penalties for violations.
Over the past year, prediction markets such as Kalshi and Polymarket have surged in popularity. They allow users to speculate on political, economic, and geopolitical events. While U.S.-regulated platforms cannot offer markets directly tied to wars, offshore platforms continue to host such contracts.
Maduro Case Sparked Federal Action
The proposed restrictions follow the first federal insider trading prosecution involving prediction markets. Specifically, federal prosecutors allege that a U.S. special forces soldier earned roughly $400,000 trading on Polymarket using classified information connected to the operation that led to Maduro’s capture. However, the defendant has pleaded not guilty.
Polymarket said it referred the matter to the Department of Justice after identifying a user allegedly trading on classified government information.
Legal experts say the defense bill strengthens enforcement efforts. Military law scholar Eugene Fidell noted that violating such regulations could trigger criminal penalties under the Uniform Code of Military Justice. The code treats disobeying lawful orders and regulations as federal offenses.
Broader Insider Trading Concerns
The legislation reflects growing concerns that prediction markets may be vulnerable to insider trading linked to geopolitical events.
Critics have pointed to suspicious trading activity before several major international developments. These include the Maduro operation and military strikes involving the United States and Israel against Iran.
Although insider trading is already illegal under federal law, when people misuse confidential information that they are obligated to protect, the draft legislation goes further. It specifically targets the use of “nonpublic information,” even when that information is not classified.
For example, someone with advanced knowledge of a major defense contract award could be prohibited from betting on related outcomes before the information becomes public.
Google Engineer Case Adds Pressure
The proposal comes as federal authorities pursue another high-profile prediction market insider trading case involving former Google engineer Michele Spagnuolo.
According to recently unsealed charges, Spagnuolo faces allegations of commodities fraud, wire fraud, and money laundering tied to trades on Polymarket.
Blockchain investigator Specter claimed to have identified multiple wallets allegedly linked to Spagnuolo. According to the analysis, the wallets generated more than $2.5 million in combined profit-and-loss activity across prediction markets.
The investigation alleges that one wallet operating under the alias “AlphaRaccoon” was connected to several other accounts. It also claims that Spagnuolo had extensive experience in decentralized finance before the alleged insider trading activity.
Specter argued that the trading pattern suggests the use of confidential information may have begun after significant trading losses accumulated. According to the investigator, it was not part of a long-running strategy.
Wider Government Crackdown Emerging
The proposed Pentagon rules are part of an effort by government institutions to limit abuses in prediction markets.
Recently, the U.S. Senate prohibited senators from participating in prediction markets. Some members of the House have also restricted their staff from using the platforms.
The governors of California and Illinois have signed executive orders preventing state employees from using insider information to trade on prediction market platforms.
Meanwhile, the Commodity Futures Trading Commission has pledged to intensify enforcement against insider trading in the sector. However, some lawmakers have raised concerns that the agency lacks sufficient staffing to effectively oversee the rapidly expanding industry.
As prediction markets attract more mainstream attention and larger volumes of capital, regulators seek to ensure that participants compete on equal footing.
Related: Crypto Prediction Markets vs States: The Legal War Reshaping U.S. Gambling
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