US Lawmakers Target Prediction Markets: Congressional Ban Proposed as Kentucky AG Sues Polymarket and Kalshi

Representative Bryan Steil introduced legislation Tuesday that would ban members of Congress, their spouses, and dependent children from wagering on government policy and political outcomes through prediction markets. The same day, Kentucky Attorney General Russell Coleman filed lawsuits against Polymarket and Kalshi, alleging unlicensed sports betting activity by the platforms.

The dual regulatory assault marks a significant escalation in scrutiny of prediction markets, which have operated in a gray zone between legitimate price-discovery tools and unregistered gambling or derivatives platforms. Steil, a Wisconsin Republican who chairs the House Administration Committee, framed his Stop Lawmakers from Predicting Act as a conflict-of-interest measure. The bill would prevent lawmakers from profiting on bets tied to legislative outcomes, budget votes, or other government decisions they influence.

The proposal targets a specific vulnerability: lawmakers with access to nonpublic information could theoretically place bets on policy outcomes before those outcomes are publicly known, creating an asymmetric information advantage similar to insider trading in securities markets.

Polymarket and Kalshi have become the two dominant platforms for political and event-based wagering in the US. Kalshi secured conditional approval from the Commodity Futures Trading Commission (CFTC) in 2023 to offer limited event contracts, marking the first CFTC-regulated prediction market. Polymarket operates through a more opaque legal structure, though the platform has faced intermittent regulatory questions since its launch.

Kentucky's legal action takes a different approach. Attorney General Coleman alleges that both platforms are operating as unlicensed sports betting services, a claim that challenges the distinction prediction market operators have tried to maintain between their products and traditional gambling. The lawsuit also names Coinbase-linked prediction market activity, suggesting the investigation may extend beyond the two major platforms to include other market participants or integrations.

The timing of both actions suggests coordinated or parallel pressure on the prediction market industry. Congressional interest in restricting lawmaker participation reflects genuine conflict-of-interest concerns, particularly as prediction markets have gained visibility and liquidity. Steil's bill does not propose to ban prediction markets entirely, only to prohibit federal elected officials from using them. That narrower scope may make passage more likely than broader bans, though the bill still faces an uncertain path through the House.

Kentucky's enforcement action, by contrast, challenges the legal foundation on which prediction markets operate. If the state successfully argues that prediction markets constitute unlicensed sports betting, it could force platforms to either obtain state sports betting licenses or cease operations in Kentucky. Other states may follow Kentucky's lead, creating a patchwork of state-level restrictions that would complicate operations for national platforms.

Prediction market advocates argue that these platforms serve legitimate purposes distinct from gambling. They provide price discovery, allow hedging, and aggregate distributed information more efficiently than traditional polling or forecasting. Supporters contend that congressional trading restrictions should focus on traditional securities markets, where lawmakers have greater influence over outcomes. They also point to Kalshi's existing CFTC approval as evidence that regulatory compliance pathways already exist.

The industry may also challenge Kentucky's characterization of prediction markets as unlicensed sports betting. Prediction markets on government policy, elections, or other non-sports events operate under different legal theories than traditional sports betting. Federal regulatory authority over derivatives markets, including prediction contracts, may conflict with state sports betting enforcement. Legal challenges to Kentucky's lawsuits could center on whether states have jurisdiction to regulate what are arguably federal derivatives products.

Polymarket and Kalshi have not yet publicly responded to the lawsuits or Steil's proposed legislation. Both platforms will likely face pressure to clarify their legal status and compliance frameworks. The broader prediction market industry, which includes smaller platforms and decentralized protocols, may also face increased scrutiny as regulators and lawmakers view prediction markets as a category requiring oversight.

As prediction markets grow in volume and cultural prominence, policymakers are moving from benign neglect to active enforcement. Steil's bill targets a narrow conflict-of-interest problem. Kentucky's lawsuit challenges the fundamental legal basis for prediction market operations. Together, they signal that the era of regulatory ambiguity for prediction markets may be ending.