Prediction Markets Spark Legal Firestorm Across the United States
State lawmakers and gaming regulators are intensifying their crackdown on prediction markets, labeling these rapidly expanding platforms as "basically gambling but with another 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 Uncertainty
The legal disputes emerge as the sector experiences explosive growth. Kalshi alone witnessed more than $1 billion in trades during Super Bowl Sunday, with Bloomberg reporting its January trading volume nearing $10 billion, predominantly tied to sports. Established sportsbook operators, including DraftKings, FanDuel, and Fanatics, have recently launched their own prediction platforms, further fueling the industry's expansion.
Prediction markets enable 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 categorizing their offerings as "event derivatives," these companies operate under federal commodities law, overseen by the U.S. 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 legalized.
State Resistance and Legal Challenges Escalate
Since the Supreme Court lifted the federal sports betting ban in 2018, 39 states and Washington D.C. have legalized it, imposing taxes and consumer-protection rules on licensed operators. Gregory Gemignani, a gaming law professor at the University of Nevada, Las Vegas, highlighted the regulatory disparity, stating, "If you're a sportsbook operator in Nevada, 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, added, "What's happened is the lines between gambling and investing have been blurred. Eventually this is going to come to a head." State attorneys general, gaming commissions, and tribal regulators have issued cease-and-desist letters and filed lawsuits, arguing that prediction markets constitute unlicensed sports wagering that evades state laws and taxes. Legal experts suggest the conflict could ultimately reach the Supreme Court.
Federal Oversight and State Pushback
Under federal law, event contracts involving "gaming" are prohibited, but companies maintain their offerings are lawful "futures" traded on regulated exchanges. A Kalshi spokesperson asserted, "Consistent, national oversight is better for consumers than a patchwork of inconsistent state laws." However, states like New York have ordered Kalshi to halt sports-related contracts, prompting the company to sue, claiming CFTC oversight pre-empts state authority. Similar legal challenges are underway in Maryland, New Jersey, Connecticut, and Tennessee.
New York Attorney General Letitia James issued a consumer alert warning of the "risks posed by prediction markets," calling them "online platforms offering bets masquerading as 'event contracts.'" In response, companies have launched promotional campaigns, such as Kalshi offering $50 toward groceries and Polymarket opening a free grocery store pop-up in New York City.
Courtroom Wins and Legislative Actions
Several states have secured preliminary injunctions against prediction markets. Massachusetts temporarily barred Kalshi from offering sports contracts without a state license, while a federal judge in Nevada blocked Kalshi's sports offerings, with the company appealing to the Ninth Circuit. Nevada courts have also temporarily barred Polymarket from event-based betting in the state.
State legislators are advancing bills to regulate these platforms. In Connecticut, proposals aim to ban participation by those under 21, and Illinois is considering legislation to prohibit sports-related offerings. Hawaii Representative Scot Matayoshi, who introduced a measure to bar online platforms from offering contracts tied to real-world outcomes, stated, "This particular type of gambling really opens the door for insider trading," citing concerns about advanced knowledge in bets on political speeches.
Insider Trading and Regulatory Shifts
Prediction markets have faced scrutiny over insider trading risks, such as bets on Venezuela's president capture before Donald Trump's announcement. Kalshi CEO Tarek Mansour emphasized enhanced surveillance efforts, noting, "Our insider trading rules are adapted from the rules on NYSE and Nasdaq: if you have material non-public information on a market, you cannot trade it."
Under the Biden administration, the CFTC pursued actions against prediction markets, but since Trump's return, CFTC Chair Michael Selig has signaled support for "responsible development" and withdrawn proposals limiting political and sports event offerings. The CFTC recently formed an innovation advisory committee including prediction market CEOs, aiming to "future-proof its markets."
Broader Implications and Advocacy Concerns
Problem gambling advocates warn of risks similar to traditional wagering. Cole Wogoman of the National Council on Problem Gambling stated, "Folks are interacting and treating this as gambling," urging platforms to display the national gambling helpline. Addiction psychiatrist Timothy Fong noted, "Ideally in my world, we would have these products regulated by the people that know how to handle gambling," questioning the societal impact of commodifying human events.
As legal battles mount, the debate continues in Washington, with lawmakers proposing amendments to the Commodity Exchange Act to address state sovereignty and insider trading risks. The outcome could redefine the regulatory landscape for prediction markets nationwide.
