Karsten Wenzlaff, Advisor
August 26th, 2025
Karsten Wenzlaff is a Crowdfunding and Fintech Expert from Germany. He is Secretary-General of Digit[...]
Should Prediction Markets Be Allowed To Trade On Disasters?
Forecasting Value Meets Public Safety And Market Integrity
Last Updated: August 5, 2026
Status: Building
Organizations: Commodity Futures Trading Commission (CFTC), Polymarket, Jeff Merkley, Alex Padilla, Adam Schiff, Ron Wyden, Kalshi, CAL FIRE
Status: Building
Organizations: Commodity Futures Trading Commission (CFTC), Polymarket, Jeff Merkley, Alex Padilla, Adam Schiff, Ron Wyden, Kalshi, CAL FIRE
On August 3, 2026, nine U.S. senators asked the CFTC to consider restricting wildfire prediction markets that pay out based on how long a fire lasts, how much damage it causes or how far it spreads. Their letter to the CFTC argues that these contracts may conflict with public safety, emergency response and market integrity.
That raises a larger question. Should prediction markets be allowed to trade on disasters at all?
The evidence suggests they can, but only within much tighter limits than ordinary event markets. Prediction markets may combine information and react quickly to new public facts. That value starts to break down when traders can influence the result, hold protected information or profit as the damage grows.
See: Prediction Markets Tighten As Wealthsimple Enters
The issue comes down to four practical tests:
- Does the market add useful information? A liquid contract may improve price discovery, but thin trading, weak participation and poor wording can produce a number that looks more reliable than it is.
- Can traders influence the outcome? Wildfires create a harder problem because some people can affect ignition, spread, containment or the flow of emergency information.
- Who knows what, and when? Fire crews, contractors, utilities, officials and nearby residents may receive important information before the wider public.
- What does the contract reward? A neutral weather measurement is easier to defend than a payout that rises as more homes burn or a fire lasts longer.
The regulatory line is still being drawn. The CFTC is reviewing prediction markets, but its current proposal does not treat disasters as a separate category. Regulators now have to decide where legitimate forecasting ends and unacceptable incentives begin.
The same tension extends beyond wildfires. NCFA unveiled the boundary between informed trading and unfair advantage in When Does A Smart Prediction Become Insider Trading?
Strategic Takeaway
Disaster contracts need a tougher listing test than ordinary event markets. A platform should have to show that traders cannot control the result, the payout does not reward greater harm and the contract offers more than public attention dressed up as price discovery.
Disaster contracts need a tougher listing test than ordinary event markets. A platform should have to show that traders cannot control the result, the payout does not reward greater harm and the contract offers more than public attention dressed up as price discovery.
Evidence
Click each item to expand
1. Senators Ask The CFTC To Draw A Wildfire Boundary (August 3, 2026, United States) ⓘ
Nine senators asked the CFTC whether wildfire contracts serve the public interest and whether the agency plans guidance, enforcement or restrictions.
- The letter asks about contracts tied to fire duration, destruction and growth.
- It raises separate concerns about arson incentives, interference, insider information and public trust.
- The senators requested a response by August 14.
The request is not a prohibition. It places disaster contracts directly inside the CFTC’s wider debate over which events should be open for trading.
2. Polymarket Let Traders Price The Size Of An Active Fire (January 2025, United States) ⓘ
Polymarket opened a market on how many acres the Palisades Fire would burn before it was fully contained.
- The market opened on January 9, 2025, while the fire remained active.
- It recorded US$260,607 in volume.
- Official CAL FIRE updates determined the result.
The market used a clear public source, which helps. The harder issue is the payoff itself. Traders made money by correctly predicting how much land an active disaster would consume.
3. Prediction Markets Can Produce Useful Information (Global) ⓘ
The argument for prediction markets is not imaginary. A well run market can combine information from many participants and update faster than a survey or committee.
- Prices change as traders react to new information.
- Clear rules and strong participation can improve the value of the result.
- Weak liquidity or vague contract terms can make the visible probability unreliable.
That creates a possible public use. A wildfire market could draw attention to new weather, acreage or containment data. It still has to prove that the price adds something useful beyond the official information already available.
4. Wildfires Create A Different Kind Of Insider Risk (2026, United States) ⓘ
Prediction markets often benefit when informed people trade. That logic starts to break when the information comes from a public duty, a private contract or direct control over the event.
- Emergency workers and government officials may receive nonpublic operational information.
- Utilities, contractors and local residents may see conditions before the wider market does.
- A person with enough influence over an outcome may create both an integrity and public safety risk.
Good research is one thing. Trading on protected emergency information is another. A trader who can affect the fire belongs in an even more serious category.
5. Platform Rules Address Part Of The Problem (2026, Global) ⓘ
Polymarket now bars users from trading on stolen confidential information, illegal tips or outcomes they can influence.
- The platform monitors trading activity for suspicious behaviour.
- Its rules prohibit trading by people with enough authority to affect the result.
- Polymarket can ban wallets and refer suspected misconduct to law enforcement.
Those controls are useful. They do not settle the listing question. Surveillance usually acts after trading starts, while a badly designed contract may create a risk that should not enter the market in the first place.
6. The CFTC Has Not Set A Disaster Contract Rule (March To June 2026, United States) ⓘ
The CFTC is working through how event contracts fit with market integrity, public interest and responsible innovation.
- Its March review asks about manipulation, inside information and events controlled by a small group.
- The June proposal covers terrorism, assassination, war, gaming and unlawful conduct.
- It creates a proposed 90 day review process but does not name wildfires or disasters as a separate category.
That leaves an open decision. A wildfire contract may still fail a manipulation, unlawful conduct or public interest test, but disaster status alone does not yet settle the issue.
Where The Line Belongs
A blanket ban on anything connected to weather or catastrophe would go too far. Insurance, weather derivatives and catastrophe bonds help businesses and investors manage risks they already carry. They are not the same as a retail trader buying a position because a fire may destroy more property.
The better test starts with the contract itself.
Contracts that pay more as deaths, destruction or suffering increase should generally not be allowed. Regulators do not need proof of arson before deciding that the incentive itself creates too much risk.
Contracts that insiders or participants can influence need strict exclusions. Fire crews, government officials, contractors and others with protected information or operating control should not be allowed to trade.
See: When Prediction Markets Start Pricing Geopolitics
Markets built on public data may have a stronger case when the outcome is neutral, the rules are clear and the platform can explain what useful decision the market supports.
Position limits, trading pauses and conflict checks can reduce risk, but they cannot rescue a contract whose basic payoff rewards greater harm.
Market prices shouldn’t be presented as emergency forecasts unless the platform can prove they are reliable and add something useful beyond established fire forecasts.
Some people will still want a full ban. Some platforms will argue the rules go too far. The practical acid test should be: protect public safety without blocking every market that may produce useful information.
What Canada Should Decide Before A Market Appears
No Canadian wildfire prediction market has been identified. That doesn’t mean Canada should wait for one before deciding how the rules would apply.
A single contract could fall across provincial derivatives law, gaming rules, consumer protection and market integrity. The most valuable information may also be with provincial agencies, municipalities, utilities, insurers and private response firms before it reaches the public.
NCFA Innovation Opportunity Brief: Regulated Event Contract Infrastructure
Canadian regulators should decide now whether contracts tied to deaths, destruction or an active emergency should be allowed at all. They also need clear rules on who can trade, how protected emergency information is handled and what happens when an offshore platform lists a market on a Canadian disaster.
The first case will be easier to manage if the rules are already clear. Waiting for a public controversy would leave regulators reacting after the risk has arrived.
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