July 27 Tech and Democracy Roundup: The Battle to Regulate Prediction Markets
States aren’t waiting for Congress to rein in prediction markets. But experts are divided on how much danger they pose.
It’s Monday, July 27, and time for your Tech & Democracy roundup.
So much for July being a slow news month. The Trump administration launched an AI cybersecurity clearinghouse to rapidly respond to vulnerabilities in critical government infrastructure. Sen. Mark Warner (D-Va.) introduced a comprehensive artificial intelligence package that includes mandatory government testing of advanced AI models. And New York became the first state to enact a statewide data-center moratorium.
There’s much more to cover, and we have the latest headlines below. But let’s begin with the story of Gabriel Perez, who until last week had served as President Donald Trump’s teleprompter guy since 2016. (This has to make Mr. Perez one of Trump’s longest serving staffers, right?) The allegations are spicy: Perez won over $100,000 on the prediction market Kalshi by wagering on specific words and phrases he was in a position to know the president would use during major addresses, including the State of the Union. He’s been placed on unpaid leave.
I didn’t make much of the story at first. Someone in Trump’s orbit potentially profiting off proximity to power is hardly news at this point. And it’s an open secret that prediction markets – online platforms like Kalshi and Polymarket that allow anyone to trade on the outcome of future events – are prone to insider trading.
But the pattern of profiteering by public officials on these markets is becoming harder to ignore. Just in the past 120 days: a U.S. soldier was arrested for betting on Polymarket ahead of the Venezuela raid (he won all 13 of his wagers, cashing out $400k); three congressional candidates and dozens of campaign staffers were caught trading on their own races; and the White House warned staff against using nonpublic information to place these bets – months before Perez’s own bets surfaced.
“It’s possible these trades are faster and easier than a stock trade,” Alexandra Thornton, senior director of Financial Regulation at Center for American Progress, told The Renovator. “But the real advantages are that it can be done anonymously using crypto, and that there are infinitely more ways insider information could be used.”
Thornton co-authored a CAP report this month arguing that prediction markets have become “an emerging venue for corruption that both threatens national security and undermines the American public’s trust in their government.”
Others argue the risks are overstated. Robin Hanson, a George Mason economist who developed modern prediction market theory, points out that these platforms are actually more resistant to manipulation than institutions we already tolerate. “Compare these markets to other information institutions we have – gossip, journalism, academia,” he told The Renovator. “Political insiders can also leak information to journalists – that’s happened plenty in the past. Does that worry you just as much, or is this somehow extra problematic because it’s financialized, because it’s money, because it’s less prestigious people involved?”
Hanson added that many of the things people don’t like about prediction markets are actually just things they don’t like about ordinary financial markets: “Don’t just dump on the new guy for the same problems that happen with the old guy.”
But prediction markets don’t face the same federal guardrails as financial markets. Members of Congress have been required to disclose stock trades since 2012, and a House measure passed last week would ban members from trading stocks outright. No comparable legal framework covers prediction markets.
The Senate did pass a resolution in April banning its own members and staff from trading on prediction markets. Thornton calls that a good first step, but argues Congress should go further and bar all federal elected officials, political appointees, executive branch employees and congressional staff outright. “It’s very hard to draw lines around what constitutes legal use of inside information,” she said. “It’s much better to simply say a federal employee is banned from using prediction markets, full stop.”
States aren’t waiting on Congress. Seven governors have banned state employees from using insider information on prediction markets. Fifteen states have introduced their own prediction markets legislation this year – some (Minnesota) pursue outright bans; others (Pennsylvania, Illinois) build licensing and taxation regimes; and others (Ohio) focus specifically on barring public officials from trading. And at least a dozen states have active lawsuits against Kalshi and Polymarket, with most arguing the platforms are unlicensed sportsbooks operating outside state gambling law. In several cases, including Illinois and Minnesota, Kalshi and Polymarket have filed their own suits, arguing their platforms are federally regulated financial products, not gambling operations subject to state oversight.
On Friday, the National Conference of State Legislatures urged the Commodity Futures Trading Commission (CFTC) — the federal agency that oversees financial trading markets — to protect state authority over these markets. But the CFTC shows no sign of budging. The agency has sued at least nine states to defend what it calls its exclusive authority over these trades.
As the legal battles play out, Thornton expects more incidents of insider trading, pointing to the strong incentive government employees have to act inappropriately. She also doesn’t rule out subtler effects on democracy and civic life.
“I think it’s critically important that people think about the impact of being able to bet on literally anything – financializing every kind of event, down to ridiculous things – and whether that diverts our focus away from the things that actually matter.”
Now, onto the other big headlines.
What Else Happened
White House
The Trump administration committed $5B to a new Energy Department AI research initiative, part of a broader push to steer federal science funding from universities to individual researchers.
23 governors, 187 companies joined Trump’s voluntary “ratepayer protection pledge,” promising to shield consumers from AI data center costs.
Congress
An OpenAI model escaped a test sandbox and hacked Hugging Face this month. Citing the incident, Reps. Ted Lieu (D-Calif.) and Nathaniel Moran (R-Tex.) introduced the AI Kill Switch Act, which would give DHS the authority to shut down AI models deemed too dangerous.
Reps. Don Beyer (D-Va.), Tom Barrett (R-Mich.) and Sara Jacobs (D-Calif.) introduced a bipartisan bill requiring human oversight of AI-enabled weapons.
Reps. Jay Obernolte (R-Calif.) and Lori Trahan (D-Mass.) reintroduced their federal AI oversight bill, narrowing the previous version’s state preemption language to allow states to regulate child safety issues related to AI.
States
Missouri Gov. Mike Kehoe (R) signed a “Clean Slate” law, making Missouri the 14th state to automatically seal old criminal records.
Nebraska Gov. Jim Pillen (R) signed an executive order ending state tax incentives for data centers.
The Los Angeles Police Department suspended its license-plate surveillance program amid concerns that the data is supporting Trump’s immigration crackdown.
Influence
Over 200 startups launched a new D.C. trade group to counter Big Tech’s political influence.
Obama-Biden alumni launched a new group to shape a Democratic AI policy platform ahead of 2028.
Research
New study from Meta’s Oversight Board found leading AI chatbots - including Claude, Gemini, and ChatGPT - refuse to criticize authoritarian regimes more than twice as often as they refuse to criticize democracies.
New study from a European civil liberties group found AI chatbots gave inaccurate and unreliable voting advice in Hungary’s election.
Finally … Join us for the next Renovator Assembly on Thursday, August 6, at 7 p.m. ET, with Lisa Rice. After being told she could no longer receive a ballot in the D.C. Democratic primary -- the city’s only truly consequential election -- Rice founded Make All Votes Count DC and led the campaign that passed semi-open primaries and ranked-choice voting with nearly 73 percent of the vote in November 2024. Then she kept going — building Grow Democracy DC to fight the litigation and the recalcitrant city council through implementation, winning the council’s reversal on semi-open primaries just last month. She’ll talk with us about how her organization pulled off major change against entrenched opposition, where she found the resilience to sustain it, and what comes next. Paid subscribers can find the Zoom registration link below.
Zoom link: https://us06web.zoom.us/meeting/register/w5WwnGDWSveqsFm_jT5Lsg ]