Prediction Markets Face Legal Setback as States Assert Control Over Online Betting
What Are Prediction Markets and Why Are They Growing?
Prediction markets are online platforms where people buy and sell contracts based on the outcome of future events. These contracts pay out if the predicted event happens, making them a form of peer-to-peer betting. The main appeal of prediction markets is their ability to gather the “wisdom of the crowd,” which often leads to forecasts that are as accurate as, or even better than, expert opinions. In recent years, platforms like Kalshi and Polymarket have expanded beyond traditional sports betting. Now, users can wager on everything from political elections to pop culture events and economic data. This expansion has made prediction markets more accessible and popular, especially since they are easier to understand than many complex financial products.
Federal vs. State Regulation: The Core Legal Battle
The most widely reported story about prediction markets yesterday was a major legal setback for the industry. A federal court in Nevada ruled that the state’s gaming regulators have authority over certain sports-based event contracts offered by Kalshi, a leading prediction market platform. This decision challenges the belief held by companies like Kalshi and Polymarket that they operate only under federal oversight from the U.S. Commodity Futures Trading Commission (CFTC) and are exempt from state gambling laws.
The court’s ruling focused on the difference between contracts considered “swaps” under the Commodities Exchange Act—which are federally regulated—and those based on sporting outcomes, which the judge said fall under state gaming laws. Judge Andrew Patrick Gordon wrote that Congress did not intend for federally regulated derivatives markets to become nationwide gambling venues that are immune from state regulation. This means that states like Nevada can enforce their own rules on sports-related prediction contracts, even if the platform is federally licensed.
How the Ruling Impacts Kalshi and the Industry
The immediate impact of the ruling is significant for Kalshi and other prediction market operators. Previously, Kalshi had a court order that blocked Nevada from taking action against its sports contracts. That order was dissolved after the court’s decision, opening the door for state regulators to step in. Kalshi plans to appeal the decision to the Ninth Circuit Court of Appeals, arguing that conflicting rulings from other federal courts create uncertainty about who has the final say over prediction markets.
This legal uncertainty is not limited to Nevada. Other states may now feel empowered to assert their own regulatory authority over prediction markets, especially those tied to sports outcomes. This could force platforms to adapt to a patchwork of state laws, making it harder to operate across the country. The ruling also raises questions about the future of federally regulated prediction markets, which have so far been able to bypass state gambling restrictions.
Why Prediction Markets Are Attracting Mainstream Attention
The legal battle comes at a time when prediction markets are gaining mainstream traction. During this year’s Thanksgiving holiday, conversations about cryptocurrency shifted toward prediction markets, showing their growing popularity. Platforms like Kalshi and Polymarket now let users bet on a wide range of events, from the outcome of the SEC Championship Game to the release date of Spotify Wrapped or the next move by Elon Musk on social media.
Major financial firms are taking notice. Robinhood recently expanded its prediction market offerings through a partnership with Susquehanna International, which led to a surge in its stock price. Since launching with Kalshi, Robinhood has seen over 1 million users trade 9 billion contracts, generating $100 million in annualized revenue. The new deal with Susquehanna will allow Robinhood to offer even more event contracts, making it a more complete finance hub for retail investors.
Economic and Social Risks of Prediction Markets
Despite the excitement, there are growing concerns about the risks of easy access to prediction markets. A recent report from Bank of America warned that the rise of prediction markets and mobile sports betting could lead to credit overextension and more loan defaults. The report said that the gamified interfaces of these platforms may encourage impulsive wagering, especially among younger users.
Liquidity stress indicators are also showing warning signs. Surveys show that one in four bettors report missing bill payments, and nearly half lack enough emergency savings. This could challenge traditional lending models and risk pricing used by banks, as online betting introduces new types of financial risk not previously considered. Financial analysts urge caution, warning that the mix of entertainment and speculative finance may pressure credit quality and increase delinquencies.
Polymarket’s Rise and the Role of Blockchain
The story of Polymarket shows both the promise and the challenges of prediction markets. Founded by Shayne Coplan, Polymarket is a blockchain-based platform that lets users bet on a wide range of future events, from economic data to political outcomes. The platform has attracted major investments, including a $2 billion stake from Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange. This investment valued Polymarket at $9 billion and made Coplan one of the youngest self-made billionaires.
Polymarket has faced its own regulatory hurdles. In 2022, it paid a $1.4 million fine to the CFTC for offering unregistered markets and was ordered to block all U.S. users. Despite this, activity on the platform surged during the 2024 U.S. presidential election, with bets totaling $3.6 billion. To legally operate in the U.S., Polymarket acquired a dormant CFTC-licensed derivatives exchange, allowing it to comply with federal regulations.
The platform’s success has drawn attention from both supporters and critics. Supporters argue that deregulation has opened opportunities for innovation and early investment in crypto and prediction markets. Critics, however, warn that the current regulatory environment creates loopholes for unregulated gambling, potentially exposing users to financial harm.
State vs. Federal Authority: What Happens Next?
The legal battle over prediction markets is far from over. Kalshi’s appeal to the Ninth Circuit could set a precedent for how these platforms are regulated in the future. Policy analysts like Jaret Seiberg of TD Cowen believe the issue may ultimately reach the U.S. Supreme Court, given the conflicting rulings from lower courts. Even with an expedited schedule, a Supreme Court decision could take years.
In the meantime, states are likely to keep asserting their authority over gambling and betting activities, including prediction markets. Some analysts suggest that a compromise could be reached, allowing states to tax and regulate sports-tied event contracts while letting federally licensed platforms operate without being forced out. This would require careful coordination between state and federal regulators, as well as clear guidelines for platforms and users.
The Broader Impact on Sports Betting and Finance
The outcome of this legal battle will have far-reaching consequences for both the sports betting and financial industries. Federally regulated prediction markets can currently bypass state gambling laws, avoiding the high taxes imposed on traditional sportsbooks. This threatens the revenue streams of established sports betting operators, which generated $13.7 billion in revenue in 2024 alone.
Partnerships between prediction market platforms and major sports entities are already changing the landscape. Polymarket and Kalshi have formed alliances with organizations like PrizePicks, the National Hockey League (NHL), DraftKings, and the Ultimate Fighting Championship. These partnerships show the growing integration of prediction markets into mainstream sports and entertainment.
At the same time, major tech and finance companies are moving into the space. Google Finance and Yahoo Finance have announced plans to integrate prediction market data into their platforms, increasing visibility among retail investors and traders. This could further blur the lines between entertainment, finance, and gambling, raising new questions about consumer protection and market integrity.
How Users Can Legally Participate in Prediction Markets
For now, users in most states can legally participate in prediction markets through federally regulated platforms. These markets work by letting users buy “yes” or “no” contracts on specific outcomes, with prices reflecting the collective probability of each event. For example, a contract predicting a team’s victory might be priced at 55 cents, showing a 55% chance of winning. If the outcome happens, the contract pays out $1; if not, the buyer loses their investment.
Unlike traditional sportsbooks, prediction markets are peer-to-peer platforms that charge small fees rather than profiting from losing bets. This model has made them attractive to users in states where sports betting is still illegal. However, as the recent court ruling in Nevada shows, this legal status could change as states move to assert their own regulatory authority.
Looking Ahead: The Future of Prediction Markets
The future of prediction markets will depend on how regulators, courts, and industry players respond to the current legal challenges. If states succeed in asserting their authority, platforms may need to adapt to a more fragmented regulatory environment, which could limit their growth. On the other hand, a clear federal framework could allow prediction markets to keep expanding, offering new opportunities for users and investors.
What is clear is that prediction markets are no longer a niche product. They are attracting attention from major financial institutions, tech companies, and regulators, all eager to shape the future of this fast-changing industry. As the legal battle continues, the outcome will determine not only the fate of platforms like Kalshi and Polymarket but also the broader relationship between finance, technology, and gambling in the United States.
