Stew, a 35-year-old from Montana, has spent the past year and a half casually placing sports bets since downloading the Kalshi app.

A few weeks ago, however, after reading online chatter about increased late-night pizza deliveries to the Pentagon, he decided to try something different. He put $10 (£7.50) on a prediction that Iran’s Ayatollah Ali Khamenei would be “out” of power by 1 March.

The wager pushed the boundaries of what Americans are legally permitted to bet on.

Prediction markets — run by companies such as Kalshi — have surged in popularity over the past year, facilitating more than $44bn in trades.

They are reshaping the US betting environment, where sports gambling was mostly prohibited until 2018 and election betting remained restricted for years until 2024.

Although much of the activity centers on sports, users can speculate on a wide array of outcomes, from local election results to interest rate decisions by the Federal Reserve, and even unconventional topics like the predicted year of Jesus Christ’s return.

The platforms gained major traction during the 2024 US presidential race after a court decision allowed them to accept election-related wagers. At one point, the odds on these markets appeared to favor Donald Trump.

More recently, attention has shifted to darker bets tied to military tensions involving Iran, Venezuela and Israel.

Under US financial regulations, contracts connected to war, terrorism, assassination, gaming or other illegal acts are generally prohibited.

Nevertheless, millions of dollars have continued to flow into such markets.

Critics argue that the platforms are enabling distasteful — and potentially unlawful — speculation on armed conflict. They warn of national security concerns and the risk of insider trading and corruption.

Craig Holman of the advocacy group Public Citizen, which recently filed a complaint over the issue, said the expansion of betting into matters such as the potential death of a head of state crosses a troubling line.

According to financial reports, Polymarket alone handled more than $500m in wagers connected to the Iran conflict, at one stage even listing a market on the possibility of a nuclear detonation.

The New York-based company, which has limited US operations, later removed that particular market after online backlash. However, users can still bet on questions such as when US forces might enter Iran. The company declined to comment.

Kalshi also cancelled the market concerning Khamenei, which had attracted $54m in trades, stating that US-regulated platforms are not allowed to host contracts that directly settle on someone’s death.

The firm has maintained that certain war-related bets are taking place on exchanges operating outside US regulatory oversight. It did not provide comment for this article.

The controversy over war-related contracts has become part of a broader dispute about how prediction markets should be supervised.

Unlike traditional bookmakers, which set odds themselves, prediction platforms operate more like exchanges. Users trade “event contracts” with one another based on the outcome of future developments.

This structure has placed them under the jurisdiction of the Commodity Futures Trading Commission (CFTC), the federal agency overseeing derivatives markets.

Opponents argue that, despite this framework, the platforms function much like gambling operations and should be regulated — and taxed — as such by individual states rather than as financial exchanges.

The disagreement has led to numerous legal clashes nationwide, with states seeking authority to regulate these companies in the same manner as other gaming businesses instead of deferring to the CFTC.

Some Republicans have also expressed reservations, while established gambling companies have intensified lobbying efforts, including hiring former Trump official Mick Mulvaney to represent their interests in Washington.

Ben Schiffrin of Better Markets, a financial reform group, said the debate is not about banning gambling outright but about ensuring that activities resembling gambling are regulated accordingly.

Questions about suspiciously timed wagers tied to military operations in Israel, Venezuela and Iran have further fueled calls for oversight.

Recently, Democratic lawmakers introduced legislation to prevent federal officials from trading event contracts. They cited cases such as a newcomer to Polymarket earning nearly $500,000 by correctly predicting the capture of Venezuela’s president shortly before the news became public.

Lawmakers have also issued consumer warnings about insider trading risks and urged federal authorities to more clearly enforce prohibitions on war-related betting.

Despite this, a sweeping crackdown appears unlikely.

The Biden administration had previously taken a tougher stance, proposing a ban on sports- and politics-related event contracts. That effort stalled following a court setback and the 2024 election of Donald Trump, who pledged a lighter regulatory approach.

Last month, the CFTC formally withdrew its proposal to prohibit sports and election-related contracts.

The agency has also supported prediction market companies in their disputes with state regulators. CFTC chairman Michael Selig recently criticized state actions as overly aggressive.

He argued that event contracts can serve legitimate economic purposes, helping businesses hedge against risks linked to future events.

Selig added that while the products are popular with Americans, platforms must still comply with applicable rules.

Facing mounting scrutiny, Polymarket has announced measures to strengthen oversight of suspicious activity. Kalshi, which highlights its status as a regulated exchange, has become more outspoken about its anti–insider trading efforts.

The company recently disclosed penalties in two insider trading cases and reported launching roughly 200 investigations over the past year.

Kalshi ultimately cancelled the $54m market related to Khamenei’s removal from power.

In statements explaining the decision, the firm reiterated that it does not list markets directly tied to a person’s death, noting that this limitation was included in its terms of service.

It also pledged to clarify those terms more prominently in the future, saying it had learned from the episode.

Still, the cancellation angered some users, including Stew. He argued that the relevant rules had not been clearly presented at first and questioned the company’s reasoning, suggesting that there were only limited realistic scenarios under which Khamenei would be “out.”

Although Stew received a refund, he remains uncertain that additional regulation would resolve the issue. In his view, much of the debate revolves around terminology.

“They call it contract trading, and technically that may be accurate,” he said. “But if we’re being honest, it’s still betting.”