Over the past year, prediction markets have been attracting capital from Wall Street and seeking legitimacy in Washington, propelled by an ambitious pitch: markets allowing individuals to wager on real-world events can generate superior, faster information than any other source. This past weekend, as the US and Israel launched airstrikes against Iran and traders scrambled for profits, the conflict starkly exposed the significant moral and legal risks inherent in this model. The industry has already attracted substantial funding and heavyweight backers. Polymarket, backed by Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange, operates largely overseas with minimal US regulatory oversight and holds a valuation of $9 billion. Kalshi, regulated by the US Commodity Futures Trading Commission (CFTC), is valued at $11 billion and has partnered with Tradeweb Markets. Combined, the two platforms facilitated hundreds of billions of dollars in trading volume last year. Both platforms permitted traders to place bets related to the situation in Iran. Following the death of Ayatollah Ali Khamenei in the attacks on Saturday, both platforms faced intense criticism. On Polymarket, contracts related to the timing of US military strikes saw trading volume exceeding $529 million, with blockchain analysts also identifying suspicious betting activity from newly registered accounts. The platform's market on "Is Khamenei no longer the Supreme Leader?" was ultimately resolved to "Yes." Kalshi, meanwhile, attempted to mitigate risk. Its contracts related to Khamenei saw over $50 million in volume and featured special terms: in the event of his death, positions would be settled based on the last traded price before his demise, rather than a simple binary win/loss payout. The platform stated it does not offer markets that settle on death; contracts related to war, terrorism, or assassination are generally prohibited on regulated US exchanges. These terms were quickly tested. A surge of capital entered this market on Saturday, with some trades reportedly occurring even as news of Khamenei's death emerged. Kalshi pinned the contract on social media that morning with an explanation, then halted trading. That evening, its CEO pledged on social media to refund all fees from that market. Ultimately, Kalshi also covered users' net losses—a move that reportedly cost the company approximately $2.2 million. This incident highlighted a gap that neither regulation nor contract design has fully addressed: how to allow betting on geopolitical events without encountering the ethical issues the rules are meant to prevent. A Kalshi spokesperson stated, "Our rules were clear from the start, never changed, and settlement was completed according to them. We refunded all fees and net losses because we believed the user experience could have been clearer." Polymarket did not immediately respond to requests for comment. The controversy has brought into public view a dispute the industry would likely have preferred to handle privately. Supporters argue that geopolitical contracts have genuine informational value—a liquid market where traders risk real capital can generate faster, more accurate signals than traditional intelligence analysis or news reporting. They also cite hedging utility: shipping companies transiting the Strait of Hormuz or oil traders facing Middle Eastern supply risks could use these contracts to manage exposure at a speed unattainable with traditional insurance. Kalshi CEO Tarek Mansour argued that the Khamenei market had legitimate uses. He pointed out that leadership changes in Iran impact global oil prices, national security, and the broader world order, and that authoritarian leaders can leave power without dying, as seen with Venezuela's Maduro in January. "We do not list markets that are directly tied to death," Mansour wrote on platform X. "When a market has a potential outcome that involves death, we design the rules to avoid people profiting from it." Critics counter that the incentives created by war markets are fundamentally different from betting on elections or economic data. When the underlying event involves violent conflict, the risk of abuse is extremely high. In February, Israeli authorities filed what is believed to be the world's first criminal case linking prediction market bets to classified military intelligence. "These for-profit private financial companies want it both ways: maximize trading on all events while narrowly interpreting laws that explicitly prohibit trading on assassinations and war," said Dennis Kelleher, CEO of Better Markets, in an email. This backlash comes at a critical juncture. New business models, fueled by the belief that "anything measurable can be traded," are emerging, allowing bets on everything from press conference durations to war outcomes. Prediction markets represent the purest expression of this impulse: removing intermediaries, letting the crowd set prices, and treating the result as truth. The betting on Iran tests whether this logic has any limits. "Manipulating the Game" Less than a week before the airstrikes, a group of Democratic senators, led by California's Adam Schiff, sent a letter to CFTC Chairman Michael S. Gottlieb urging the agency to crack down on contracts related to war and assassination. They set a response deadline of March 9th, a date that now falls squarely within the context of actual warfare. Connecticut Democratic Senator Chris Murphy further stated over the weekend that he is drafting legislation to ban what he called "corrupting and destabilizing prediction markets—where insiders, particularly government insiders, can manipulate the game to profit off certain bets." The industry's own trade group, the Prediction Market Association (of which Kalshi is a member), responded to the senators' letter on X, stating that "contracts involving death should not exist on US exchanges." Days later, one of its members was forced to suspend a contract following the death of the subject. Amanda Fischer, former Office Head at the US Securities and Exchange Commission, stated, "The confusion and backlash over how the bets were settled highlights that these betting markets should not exist in the first place." In a post on X on Sunday evening, Kalshi's Mansour said the exchange "learned a lot" from the Khamenei market. He added that future markets involving the potential for death would be presented differently, with special terms clearly highlighted before investors trade.