The surge in prediction markets has sparked a heated debate in the US, with lawmakers and regulators calling for stricter oversight of these platforms. At least 20 federal lawsuits have been filed against companies like Kalshi and Polymarket, disputing whether they should be treated as federally regulated financial exchanges or as gambling operations.
According to Gregory Gemignani, a gaming law lawyer and professor at the University of Nevada, Las Vegas, the lines between gambling and investing have become increasingly blurred. "The prediction markets have none of the regulations that sportsbooks and casinos have," he said. John Holden, a business law professor at Indiana University, added, "Eventually, this is going to come to a head."
Prediction markets allow users to trade on the outcome of various events, from sports and elections to award shows and speeches. Unlike traditional sportsbooks, users trade against each other rather than against the house, with platforms collecting transaction fees. Kalshi and Polymarket, two of the leading prediction market platforms, argue that their offerings are lawful "futures" traded on regulated financial trading exchanges.
Legal Battles and Regulatory Uncertainty
The legal battle over prediction markets has intensified in recent months, with state lawmakers and gaming regulators moving to curb these platforms. New York's gaming commission has ordered Kalshi to stop operating in the state, while Massachusetts has obtained a preliminary injunction temporarily barring Kalshi from offering sports contracts without a state license.
Meanwhile, the US Commodity Futures Trading Commission (CFTC) has filed 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 The CFTC's new chair, Michael Selig, has signaled support for the "responsible development" of event contracts and withdrawn proposals that would have limited political and sports event offerings.
Some state lawmakers are advancing bills targeting these platforms, including legislation in Illinois that would prohibit sports-related offerings and a measure in Hawaii to bar online platforms from offering contracts tied to real-world outcomes. Scot Matayoshi, the Hawaii state representative who introduced the measure, said the offerings were "basically gambling but with another name and through a loophole."
Insider Trading Concerns and Regulatory Framework
Insider trading concerns have also been raised, with Polymarket making headlines earlier this year after bettors reportedly profited by predicting the capture of Venezuela's president, Nicolás Maduro, before Donald Trump's announcement. Kalshi has expanded its surveillance and enforcement efforts to detect and remove accounts engaging in insider trading and market manipulation.
The CFTC has unveiled a new "innovation advisory committee" composed of CEOs from companies including prediction markets such as Kalshi and Polymarket, crypto firms such as Coinbase, and major gambling operators including FanDuel. Sports leagues and gambling industry groups have urged the CFTC to impose a regulatory framework for these prediction markets, comparable to those imposed on state-licensed sportsbooks.
Problem Gambling and Societal Implications
Problem gambling advocates warn of broader risks, with the National Council on Problem Gambling urging the CFTC to adopt rules that prioritize players' health. Cole Wogoman, the council's director of government affairs and league partnerships, said, "Folks are interacting and treating this as gambling." The council has called for the platforms to display the national gambling helpline.
Clinicians are also watching closely, with Timothy Fong, an addiction psychiatrist and gambling researcher at UCLA, saying that more patients are using the platforms and describing themselves as "investors" rather than "gamblers." Fong added, "Ideally, we would have these products regulated by the people that know how to handle gambling."
The broader question, Fong said, is: "What does it mean to us as a society to speculate and put financial terms on every single human event?" He replied, "It commoditizes everything, and when you do that, it dehumanizes things."
