The surge in prediction markets has led to a growing debate over their legitimacy, with lawmakers and regulators calling them a "loophole" for gambling. As reported by The Guardian, at least 20 federal suits have been filed against companies like Kalshi and Polymarket, disputing whether they should be treated as federally regulated financial exchanges or as gambling operations.
These platforms allow users to trade on the outcome of virtually anything, from sports and elections to award shows and speeches. Unlike traditional sportsbooks, users bet against each other rather than against the "house", with platforms collecting transaction fees. The companies maintain that their offerings are lawful "futures" traded on regulated financial trading exchanges, but state lawmakers and gaming regulators argue that they are essentially unlicensed sports wagering operations that evade state gambling laws and taxes.
Gregory Gemignani, a gaming law lawyer and professor at the University of Nevada, Las Vegas, notes that "if you're a sportsbook operator in Nevada, for example, there's a lot you have to do to comply with regulations here and minimum internal control standards. The prediction markets have none of that." John Holden, a business law professor at Indiana University, adds that "what's happened is the lines between gambling and investing have been blurred. Eventually, this is going to come to a head."
Regulatory Challenges
The row escalated when the chair of the US Commodity Futures Trading Commission (CFTC) announced that it was filing a friend-of-the-court brief in defense of its exclusive jurisdiction over these derivative markets. The CFTC's new chair, Michael Selig, has signaled support for the "responsible development" of event contracts and withdrawn proposals that would have limited political and sports event offerings.
Several states have secured courtroom wins, with Massachusetts obtaining a preliminary injunction temporarily barring Kalshi from offering sports contracts without a state license. Polymarket then sued the state, arguing that only the CFTC can regulate contract markets. In Nevada, a federal judge blocked Kalshi's sports offerings in the state, and the company is appealing to the ninth circuit.
Meanwhile, some state lawmakers are advancing bills targeting these platforms. In Connecticut, the governor has proposed banning participation by those under 21, and legislation has been introduced in Illinois that would prohibit sports-related offerings. In Hawaii, where gambling remains illegal, legislators are advancing a measure to bar online platforms from offering contracts tied to real-world outcomes.
Insider Trading Concerns
Scot Matayoshi, the Hawaii state representative who introduced the measure, notes that the offerings are "basically gambling but with another name and through a loophole". He also raised insider trading concerns, citing the example of almost half a million dollars in bets for what words the Hawaii governor would say in his state of the state address.
Polymarket made headlines earlier this year after bettors reportedly profited by predicting the capture of Venezuela's president, Nicolás Maduro, before Donald Trump's announcement. The platforms say they monitor for such risks, with Kalshi expanding its surveillance and enforcement efforts to detect and remove accounts engaging in insider trading and market manipulation.
Industry Response
The American Gaming Association (AGA) and the Indian Gaming Association have urged Congress to address what they call "unregulated sports event contracts being offered by prediction markets", which they argue "are indistinguishable from legal sports betting". Chris Cylke, the senior vice-president for government relations at the AGA, notes that "this is fundamentally about state and tribal sovereignty and their ability to regulate their gambling marketplaces and to just oversee their own jurisdictions".
Clinicians are also watching closely, with Timothy Fong, an addiction psychiatrist and gambling researcher at UCLA, noting that more patients are using the platforms and describing themselves as "investors" rather than "gamblers". The National Council on Problem Gambling has urged the CFTC to adopt rules that prioritize players' health, arguing that sports-related event contracts pose similar risks to traditional wagering.
Broader Implications
The debate around prediction markets raises broader questions about the commodification of human events and the blurring of lines between gambling and investing. As Fong notes, "ideally, we would have these products regulated by the people that know how to handle gambling". The question remains: what does it mean to speculate and put financial terms on every single human event, and what are the implications for society as a whole?
