When military information and financial incentives meet, a forecasting tool can become something else entirely

Guest:	Virginia Burger and Janice Luong
Title:	The Project on Government Oversight
Summary:	Recent debate over military-related prediction markets has focused attention on who can participate and what they may know before the market does. Some analysts say that combination creates risks that traditional forecasting tools don't present.

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Interview transcript

Terry Gerton Virginia let’s start with you. This new article out from POGO talks about the military risks that prediction markets may create. What makes military prediction different from, say, a sports event?

Virginia Burger When you’re looking at military predictions, you have to understand that, you know, at the base level, the military deals in human lives, right? That is what is ultimately at stake and, you know, there may be denial of other services and domains that factor into combat and war fighting, but at its most base level warfare is the collateral and the price is human lives. And so when you are making bets on that, fundamentally, that’s what you’re betting on. And there’s a lot of ethical and moral considerations that go into that, obviously, that set it distinctly apart from something like sports betting. But in addition to that, when you have military bets, there are larger issues that come about from what it is that could be influenced, right? You know, we all know that in sports betting, if an athlete bets on themselves and then throws the game so that they get a payout, we know that’s illegal. That has been well established throughout, you know, centuries of athletics across the United States. That same principle can be carried over into military bets, right? As of right now, there are minimal restrictions on public officials, and that includes service members, from placing bets on operations that they are planning or participating in. So someone who has inside classified knowledge about military operations can go on one of these platforms and place a bet on them and they could receive a pretty sizable payout from that. And not only could they just use that information that they’ve gained to make a bet on a future event, they may actually shape future events in order to tip their hand so that they are able to make that pay or get that payout from a prediction market. And that’s not the kind of factors that we want weighing on our service members and our leaders when they are making plans that impact all of our national security.

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Terry Gerton Janice, let’s follow on to that because Virginia raises a really important point here. Inside prediction markets, what’s the specific concern when someone with non-public military information, places these kinds of bets?

Janice Luong Yeah, so following up on that, there has been a lot of examples where we are commodifying military operations and as Virginia has referenced to, raises questions around ethics, as human lives are on the line, I’ll provide a few. So Polymarket hosted a market on whether a missing American pilot, whose plane had been shot down over Iran, would be found by a specific date. Or, Kalshi hosted a market, whether the Iranian supreme leader at that time, Ali Khamenei, would leave office. Now, both of these contracts have been taken down, but this raises a concern because the question that I would ask next is how did it surpass their systems, right? And to your question of how it is a concern, it could unintentionally provide information. On military operations since transactions are public and it is very difficult to trace who placed these bets and event contracts, like for example, on Polymarket, Kalshi, Limitless, on these prediction market platforms, event contracts could be asking what date an operation will be carried out and that could be viable information for whoever are tracking these platforms.

Terry Gerton Tell us a little bit about the Van Dyke case.

Janice Luong Yeah, so Special Forces soldier Gannon Ken Van Dyke was charged with trading on material non-public information as of right now. The defendant has filed a motion to dismiss as of August 21st, and I think we will be hearing a little bit more on how this will progress in December. So, it will be interesting to see how this will play out as this is one of the first enforcement cases of insider trading concerning prediction markets.

Terry Gerton Virginia Burger is a Senior Defense Policy Analyst at the Center for Defense Information at the Project on Government Oversight, and Janice Luong is a policy analyst at POGO’s Effective and Accountable Government Team. Virginia, let me come back to you. At what point does this forecasting tool or future market become something that really can influence behavior and not just predict it?

Virginia Burger So as I mentioned earlier, these markets are open to anyone. So any service member, just like any other American, can create an account and go on there and purchase contracts and make these bets. So who’s to say that you don’t have some of these service members who engage in planning for specific operations, who make a preemptive bet well left of the actual operation start date while they are in the process of planning. And then shape their planning efforts and their contributions so that the operation plays out to the same level that they have made a prediction of. We can take a hypothetical here. Let’s say that the Marines that were in an amphibious assault craft in and around the Strait of Hormuz are preparing to take Kharg Island. That’s been something that’s been bandied about a lot since the start of the Iran conflict as a possible move. Those Marines are gonna get an order from the Pentagon with an execution window, right? We want you to do this within this timeframe. That’s gonna be their execution order. Those Marines, are going to then make their plan, right. And they’ll have a window to do that. It could be as little as six hours if they’re doing the rapid planning process. It could as many as a couple of weeks, right? And what we don’t want is there to be an incentive for our service members making those plans to shape them around potential personal profit rather than national strategic interests and the safety and security of the service members participating in them, right? Cause those Marines floating on that boat, granted, maybe not the best example cause their connectivity to the internet might be bad, but let’s say that they’re not in River City and they have full access to the Internet. Let’s say they’re sitting on that boat and they’re in six to seven hours of planning every day. Who’s to say that one of those operations officers, who’s maybe one of the more senior decision makers in the room, isn’t directing planning efforts because he made a bet on Kalshi or Polymarket that morning that the Marines would land on Kharg Island by a certain date. And, you know, he has that influence over it.

Terry Gerton Janice, what would you add there?

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Janice Luong Yeah, like, I just want to add that it is illegal to trade on material non-public information, on confidential information already, but the broader concern is that we currently don’t have the safeguards to basically discourage traders from trying to personally gain from these prediction markets, especially military personnel. We know that it is incredibly profitable at this point, based on a recent report that was released by the Anti-Corruption Data Collective, they have noted several features that made event contracts related to military matters, especially vulnerable to insider trading risks. One is that these event contracts tend to be determined by a group of individuals or an institution. They face a higher risk of insider trading. And also we know that they’re largely profitable. Recently, there were nine connected accounts on Polymarket that had a high win rate of around 98% on bets they placed on contracts related to military actions. And in those nine accounts, they have received a profit of more than $2.4 million. And another one is the Gannon Ken Van Dyke case that I’ve mentioned. He received a profit of $400,000. When we hear about these large profits that are happening with these kinds of event contracts, it creates a perverse incentive to trade. And that is, again, as Virginia has mentioned, that’s not something we want.

Terry Gerton Janice, let me ask you to take that one step further. Congress and regulators are debating how to address these concerns. Are there specific statutory or regulatory steps that you would recommend?

Janice Luong So right now, we have acknowledged that platforms banning users are not enough. Right now, that seems to be the approach that or attitude that the CFTC is taking. To take a step back, the current oversight structure for prediction markets at the moment is these platforms are self-certifying. So that means they can certify event contracts without having to flag for the CFTC and this is as a result of the passage of the Commodity Futures Modernization Act in 2000. So this was a significant amendment to the commodity Exchange Act where it changed the structure of derivative markets which cover prediction markets. Prior to the passage of that act, the CFDC was required to review event contracts before they could be traded. But after that, after passage, the agency was no longer required to review every contract prior to it being traded. So yeah, now platforms can self-certify rather than submitting new products to the CFTC for review and approval. Now there’s an open question of whether we should return to that structure. And some may argue that it is overly burdensome, but as of right now, the public supports Congress expressively prohibiting certain event contracts and military matters are in that list and that the CFTC should meaningfully enforce their rules as they have the authority to ban the contracts. Now, current CFTC rule states, [Rule] 40.11 already prohibits military, event contracts related to military war and terrorism. So they’re already prohibited, but right now there seems to be a lack of enforcement in holding these platforms accountable when they do hold these contracts.

Terry Gerton Virginia, what would alleviate some of your concerns? Is this a case of DoD needing to do training or have its own regulations to remind people that this is not a wise investment?

Virginia Burger Certainly that would help, though I’ve been in enough mandatory trainings myself as a veteran that I know that sometimes people may not be paying the most attention to them. But I think that certainly there is space for regulation within the Department of Defense itself while we wait for Congress and CFTC to figure out what is best suited for statutory enforcement. You know, we’ve seen the military struggle over the sort of last 10, 15 years to at how they handle social media within their ranks. And as that has ballooned, there has been a poor implementation of restrictions and structure for how service members should go about dealing with it. I think there is an opportunity to be learned from the services lack of action in that department that maybe, hey, we sort of passed the buck on regulating how service numbers operated in that space. Maybe we don’t make that same mistake now with prediction markets as they become more prevalent and more mainstream through Polymarket and Kalshi and other similar apps, right? So I think there we could potentially learn something and there may be a lane for internal regulations or limitations on when you can have an account or participate potentially. Hey, if you’re in a deployed status, no, you’re not able to participate in things like that. If you’re involved in a job where you are a planner for military decision-making, maybe there’s restrictions in place. Again. There are a lot of ways that they could go about handling this, but I certainly think that there is space for that in addition to regulation from Congress.

Janice Luong Yes, and at this point, it is very difficult, again, difficult to maintain every contract. As we can see, there are cracks in its surveillance systems as event contracts related to military are being hosted, are indeed being hosted. So platforms banning individual users are no longer enough. We think that congress must ban and the CFTC should be better about enforcing broader categorical bans. So instead of focusing on the users, we should shift our focus to banning event contracts, certain categories of event contracts.

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