The War Over Prediction Markets Is Just Getting Started

The political struggle in the US on the future of prediction markets such as Polymarket and Kalshi has escalated into an all-out war, and battle lines are not neatly drawn along party lines. Instead, conservative Mormons have aligned themselves with Las Vegas bigwigs and MAGA royalty have sided with liberal Democratic lobbyists. One side states that the platforms break the law by operating as shadow casinos. The other insists that they simply give people access to legitimate financial markets that are already subject to adequate government oversight. Neither camp is back.

Currently Kalshi predictive power works in all 50 states. Its primary rival, Polymarket, was banned from the US in 2022 for operating as an unregistered derivatives market, but the but why in limited capacity last year. These companies offer “event contracts” to customers, which allow them to trade shares tied to the outcomes of almost everything, from who will win the Oscar for best actor this year to what the price of Bitcoin will be at the end of the day. The most popular category by far is sports. Kalshi reported a daily record of more than $800 million in trade on Super Bowl Sunday related to the game alone, and more than $1.3 billion traded on contracts related to the event altogether.

Once a niche financial experiment, prediction markets have quickly become entrenched in mainstream culture, a transformation that has brought large sums of money into play. The industry's leading players are already billion dollar companies in their own rights. Every day, casual speculators and die-hard pundits log on to predict where the world will go next, choosing between a dizzying array of chances to win and lose.

Advocates argue that these platforms democratize access to commodity trading and are useful tools for predicting the future. And at the end of the day, they say, adults should be able to do what they want with their money. The fundamental difference between a prediction market and a casino is that “on Kalshi, there is no house, users trade against each other. Users benefit from this: they get fair prices, the ability to cash out at any time for fair market value, and winners are never banned or limited,” says Kalshi spokesman Jack Such.

But critics say that prediction markets, at least in their current form, are exploitative. “This is illegal gambling,” says former New Jersey Attorney General Matt Platkin, who recently launched a boutique law firm focused on consumer protection cases. The industry is “unregulated, untaxed, unsupervised,” he adds.

Prediction markets are currently controlled at the federal level by the Commodity Futures Trading Commission (CFTC), the agency responsible for financial instruments known as derivatives. It has struggled with the industry since the late 1980s, when the University of Iowa launched the Iowa Electronic Market, an academic project that allows participants to buy contracts based on the election results and public market outcomes.

Attorneys general and gambling regulators in many states say sports contracts on prediction markets must follow state gambling laws. One reason for the pushback is that prediction markets represent a compelling alternative to the regulated gambling industry in places like Nevada, which represent an important part of the local economy. “The states have such a vested interest,” says Alex Grishman, head of the digital assets practice at the law firm Haynes Boone. “They want to have as much of the tax revenue as possible.”

Kalshi alone faces 19 separate lawsuits across the country, and it narrowly avoided a recent temporary shutdown in Massachusetts. Federal lawmakers have also begun to weigh in; earlier this month, 23 Democratic senators expressed support for efforts to push prediction markets to adhere to state gambling laws. Platkin believes the wave of challenges is nowhere near over: “We're just at the beginning of those types of lawsuits.”