Kalshi's response to its $2.2 million Iran mess: More fine print

• Kalshi sparked outrage over how it handled bets tied to the killing of Iranian Supreme Leader Ali Khamenei.
• On Monday, it announced a proposed rule to quiet those who have said it's running a "death market."
• Prediction markets say they cut through the noise, but the rules are anything but simple

The prediction market Kalshi wants you to know that it definitely doesn't run "death markets."

In a notice filed Monday, the company proposed standardizing the terms of all its markets that implicitly depend on a person surviving.

If a person dies, according to the new rule, all bets related to them will be paid out at the odds that existed just before they died or their death was "reasonably anticipated by market participants." The rule goes into effect March 17, according to the notice.

The update comes after Kalshi paid $2.2 million to resolve complaints from users who were confused by the way it divided the $55 million wagered on Iran's Supreme Leader Ali Khamenei's ouster after his targeted killing by Israel and the US.

Previously, different Kalshi markets could have been resolved in different ways when a person who is central to the wager dies.

The point of the change, Kalshi said, was to "minimize market disruption, minimize perverse incentives, and protect the markets." It was previously flagged on X by the journalist Dan Bernstein.

Users weren't the only ones up in arms about the Khamenei killing. Federal regulations prohibit making markets based on assassination, war, terrorism, and certain other topics. On Saturday, Sen. Chris Murphy said on X that he would introduce legislation to ban "profiting off war and death."

The Khamenei episode, and Kalshi's response, are the latest examples of growing pains for the burgeoning prediction markets industry. Though they've bragged about their ability to "cut through the chaos," prediction markets are increasingly confronting the complexity and messiness of the real world — and the fine print of their rulebooks is only growing.

While rival Polymarket has taken a decidedly laissez-faire approach, Kalshi appears to be positioning itself differently.

"There's now sort of this nascent, but bipartisan movement against prediction markets. I think Kalshi's feeling the heat," said Karl Lockhart, a law professor at DePaul University who has followed the industry. "They are trying to say, 'We're not the outlandish one. We're the middle-of-the-road prediction market.'"

Kalshi has over 67,591 words of rules

The most popular events that people trade on Kalshi and Polymarket relate to sports and cryptocurrency. Together, those categories amount to roughly 90% of the activity on Kalshi, and 60 to 70% of activity on Polymarket, according to user-generated dashboards on the analytics website Dune.

But other markets draw a disproportionate amount of attention from the news media and government officials.

Some are helpful to economists and policymakers. Polymarket's accuracy increases to over 90% as events draw nearer, according to research by prediction market analyst Alex McCullough. And recent Kalshi estimates on the US consumer price index have tended to be within 0.1% of the official number.

Other markets have been controversial. Kalshi posted about its market on Khamenei's ousting after 10 a.m. ET on February 28 — before stopping trading several hours later. It decided to pay contract holders based on the probabilities of Khamenei being "out" as they stood one minute before bombs and missiles began to fall on Iran.

Nicholas Mahoney, a 30-year-old energy finance entrepreneur who wagered $4,800 on the Khamenei market, told Business Insider that Kalshi's resolution felt like a "bait-and-switch." He said it was his second time using Kalshi, and the experience left a bad enough impression that he emptied his account.

The death-markets rule was one of several new filings Kalshi lodged with the US Commodity Futures Trading Commission this week. Kalshi users have to agree to more than 180 pages of terms, rules, and policies, totalling over 67,591 words, when they create an account and when they log in, and each individual contract has its own rules.

Many users don't read them, but diehard traders say they can be helpful to resolve edge cases. In late February, Kalshi filed an update to its "mention" market rules — where users bet on what politicians, celebrities and corporate executives will say in upcoming public remarks — that runs eight pages. The existing mention-markets rules, by comparison, are two pages.

Kalshi said that it resolved the "Khamenei out" market according to the WLEADEROUT rules that were attached to the market. It previously told Business Insider that users might not have been aware of the rules because of how its website and app are designed.

On Tuesday, Kalshi updated its "Who will be the next Supreme Leader of Iran?" market, where more than $6.4 million in contracts have been struck.

The title now prominently includes the words "death settles to last traded price."

Federal rules are coming to prediction markets

Polymarket is very different from Kalshi. While it has a small, US-regulated operation that the general public cannot currently sign up for, most action takes place using cryptocurrency on a market that is legally based in Panama. While it has advertised heavily in the US, American users must mask their location if they want to trade on the international platform.

Polymarket has much more threadbare rules than Kalshi, and many of its markets are resolved according to a decentralized process that Polymarket has been known to weigh in on.

More markets exist on Polymarket than on Kalshi, including some that could violate US regulations about markets for illegal activity. Last year, several men were arrested for throwing sex toys onto the court at women's professional basketball games; Polymarket hosted markets asking whether it would happen.

More than $802 million was traded on Iran-related bets on Polymarket, most of which was tied to the chances of a US strike, according to research from Predictefy, an analytics firm. That compares to less than $80 million across a handful of Iran markets on Kalshi.

The company didn't respond to questions about whether it would consider limiting death markets.

Several markets on Polymarket have been marred by allegations of insider trading, with analysts flagging new accounts that made well-timed bets on US and Israeli military activity, including the attacks on Iran and the arrest of Venezuelan leader Nicolas Maduro.

Michael Selig, who chairs the CFTC, said at an event on Tuesday that the agency was drafting rules for what it terms "event contracts." That process could take months.

"Prediction markets have grown so much and so quickly, and they're being offered on such a wide variety of events, that rulesmaking is right now a major component of building credibility in these markets," said Harry Crane, a statistics professor at Rutgers University who has studied and used prediction markets.