Prediction Markets Under Fire as US States Escalate Legal Fight
State lawmakers and gaming regulators across the United States are intensifying their battle against prediction markets, claiming these rapidly expanding platforms are essentially gambling disguised under a different name. At least 20 federal lawsuits have been filed nationwide, challenging whether companies such as Kalshi and Polymarket should be classified as federally regulated financial exchanges or as gambling operations subject to state oversight.
Surge in Trading Volume Amid Regulatory Confusion
The legal disputes arise as the prediction market sector experiences explosive growth. On Super Bowl Sunday alone, more than $1 billion was traded on Kalshi, with Bloomberg reporting that the company's January trading volume approached $10 billion, largely tied to sports events. In recent months, established sportsbook operators like DraftKings, FanDuel, and Fanatics have also launched their own prediction platforms, further blurring the lines between investing and wagering.
Prediction markets allow users to trade on outcomes ranging from sports and elections to award shows and speeches, effectively betting against each other rather than a traditional house, with platforms collecting transaction fees. By categorising their offerings as "event derivatives," these companies operate under federal commodities law, overseen by the US Commodity Futures Trading Commission (CFTC), making them accessible in all 50 states to users aged 18 and older. In contrast, licensed sportsbooks are restricted to states where sports betting is legalised.
State Resistance and Legal Challenges Mount
Resistance from states has grown as attorneys general, gaming commissions, and tribal regulators move to curb prediction markets, issuing cease-and-desist letters and filing lawsuits. They argue that these platforms constitute unlicensed sports wagering that evades state gambling laws and taxes. With cases accumulating nationwide, legal experts suggest the conflict could ultimately reach the Supreme Court.
Under federal law, event contracts involving "gaming" are prohibited, but companies maintain their offerings are lawful futures traded on regulated exchanges. A Kalshi spokesperson emphasised that consistent national oversight is preferable to a patchwork of state laws. However, states like New York have taken action, with the gaming commission ordering Kalshi to halt sports-related contracts, prompting the company to sue, arguing that CFTC oversight pre-empts state authority.
Insider Trading Concerns and Regulatory Shifts
Concerns about insider trading have also emerged, highlighted by instances such as nearly half a million dollars in bets on the Hawaii governor's state of the state address, where advanced copies could have enabled unfair advantages. Platforms like Kalshi say they monitor for such risks, conducting investigations and freezing accounts, but critics remain wary.
The regulatory landscape has shifted under the Biden and Trump administrations, with the CFTC's new chair, Michael Selig, expressing support for the responsible development of event contracts and withdrawing proposals to limit political and sports offerings. Recently, the CFTC established an innovation advisory committee including prediction market CEOs, aiming to future-proof financial markets.
Calls for Legislative Action and Consumer Protections
In response, lawmakers are advancing bills to target these platforms. For example, Connecticut's governor has proposed banning participation by those under 21, while Illinois legislation seeks to prohibit sports-related offerings. The American Gaming Association and other industry groups have urged Congress to address what they call unregulated sports event contracts, arguing they are indistinguishable from legal sports betting.
Problem gambling advocates warn of broader risks, with the National Council on Problem Gambling calling for rules that prioritise player health, similar to state-regulated wagering. Clinicians note an increase in patients using these platforms, often self-identifying as investors rather than gamblers, raising questions about the societal impact of commodifying human events.
As the legal battle escalates, the future of prediction markets hangs in the balance, with potential Supreme Court intervention looming and ongoing debates over regulation, consumer protection, and the very nature of gambling in the digital age.
