Prediction markets used to be the quirky side dish of the internet. Maybe you placed a small bet on who’d win an election or whether a big tech merger would finally happen. Or maybe you were one of the many people who first heard of Polymarket when users started betting on whether Donald Trump would become president last year. Some folks even wagered on things like Zohran Mamdani winning the New York City mayoral election. What used to feel like a niche hobby for political junkies has now become big enough to spook the sportsbooks and rile up regulators. Now these platforms are morphing faster than regulators can categorize them.
In just a few years, prediction markets have gone from obscure forecasting tools to sprawling financial style platforms muscling into territory usually controlled by DraftKings and other gambling giants. And in August, the NHL poured gasoline on the fire by partnering with two top players in the space, Kalshi and Polymarket, which looked a lot like an official seal of approval.
We’re honored and proud to be named the Official Prediction Market Partner of the NHL.
You can now trade with no fees, no house, & no limits. pic.twitter.com/XuFOboiklY
— Polymarket (@Polymarket) October 22, 2025
Kalshi expanded its offerings soon after, rolling out sports related markets like touchdowns and score totals instead of sticking to politics and economics. Bank of America responded by downgrading DraftKings and Flutter, flagging prediction markets as yet another threat to the gambling industry.
At the same time, investors are throwing staggering sums at the newcomers. Kalshi is fielding offers that value the company north of $10 billion. Polymarket is trying to raise fresh funding at $12 to $15 billion. A surprising amount for platforms that barely existed five years ago.
But as the hype grows, so do the questions. State gambling authorities across the country are starting to wonder whether prediction markets have wandered into gambling territory.
How do prediction markets make money?
Part of the confusion comes from how these platforms work. In a prediction market, each yes or no question becomes a tradable share priced in cents. If a candidate’s nomination odds are pegged at 40%, a yes share costs 40 cents. Buy a share, wait for the outcome and if you’re right you get a dollar. With enough volume, that turns simple questions into massive markets. More than $274 million has already been wagered on whether Gavin Newsom will become the 2028 Democratic nominee.
37% chance Gavin Newsom is the 2028 Democratic Nominee pic.twitter.com/afFOIzJ59q
— Kalshi (@Kalshi) November 6, 2025
Platforms earn money differently from sportsbooks. Kalshi takes small transaction fees that scale based on trade size. Polymarket charges no fees upfront and makes money on the bid ask spread. That’s why fans of prediction markets insist these aren’t casinos in disguise.
It is worth noting that Kalshi operates under the supervision of the Commodity Futures Trading Commission (CFTC), while Polymarket grew out of the crypto world and is regulated offshore. That gap is about to narrow. Polymarket is preparing a return to the United States after buying QCEX, a smaller firm that runs a CFTC-licensed derivatives exchange and clearinghouse.
Kalshi also asks users to go through a full Know Your Customer (KYC) check when they sign up. That means they have to share things like a government ID and proof of their address. It is part of how the company follows the rules set by the Commodity Futures Trading Commission, which requires every user to verify their identity.
Polymarket takes a very different approach. Because it grew out of the decentralized crypto world, bettors do not have to share any personal information at all. They just connect a Web3 wallet and they are good to go. There is no ID check and no verification process. It means there is a growing risk to consumers, despite the obvious distinctions between the platforms and their differences from well-established sportsbooks.
These contrasts are a big part of why the regulatory landscape feels so hazy, and things have only grown more tangled as Kalshi has started moving into international markets. Even with that expansion, the company still blocks users from forty five countries, including many in the English speaking world. For now, Kalshi is still unavailable in Canada, the United Kingdom and Australia.
Federal vs state jurisdiction
Prediction markets have already shaken up the sports betting world in the years since the post-Professional and Amateur Sports Protection Act (PASPA) fell, and states may not have many tools to stop that momentum. At the federal level, Kalshi is fighting in courts in Massachusetts, California, New York, Nevada and New Jersey for the ability to offer sports related markets nationwide.
House-banked exchange wagering:
“Kalshi insists that it is not a sportsbook, but rather an exchange that matches buyers and sellers of legitimate event contracts. . . . This argument is undermined by the fact that a subsidiary, Kalshi Trading, does take bets against customers.” pic.twitter.com/9Ke2EIf0sL
— Daniel Wallach (@WALLACHLEGAL) October 26, 2025
More than sixty five tribal entities have filed an amicus brief in the New Jersey case, arguing that prediction markets violate their exclusive rights to gambling and interfere with their sovereignty. A handful of states have also urged the CFTC to step in, claiming that these markets run afoul of state gaming laws.
The stakes are high. Some observers believe the issue could end up before the Supreme Court, and whatever the justices decide will shape how gambling looks in the country for years to come.
“The interesting thing is that the CFTC is supposed to determine if the event contracts it approves are consistent with state laws. I am not sure how the CFTC determines whether the prediction markets are limiting traders to those states where sports betting is legal.” – Tom Gruca, Iowa Electronic Market Professor in Marketing and Director
A central question in the Kalshi disputes is whether prediction markets should be treated as gambling. Several states say that event contracts are simply gambling in a new wrapper. Kalshi contends the product is fundamentally different, though the company has promoted itself across the country using words like legal and bet. In California, a coalition of tribes has sued, accusing Kalshi of misleading advertising and arguing that offering prediction markets on tribal land would break both the Indian Gaming Regulatory Act and existing state compacts.
Ohio became the first state regulator to take direct aim at the trend. On August 25, the Ohio Casino Control Commission warned operators that their sports wagering licenses could be at risk if they decide to offer prediction markets in the state.
“Any business relationship between an Ohio sports gaming licensee (including its related entities or those under common ownership) with any entit(ies) offering or facilitating the offering of unlicensed sports gaming in Ohio calls into question the reputation of the licensee and the integrity of sports gaming in Ohio,” the letter, signed by Matthew Schuler, the OCCC’s executive director, stated.
That means a CFTC-approved ‘Will X team score 3 touchdowns?’ contract could be legal federally but illegal under state gaming laws, placing licensees in a bind.
Where is the line between prediction markets and gambling?
Speaking to ReadWrite, Bobby Shell, a member of the Board of Directors and VP of Marketing at Voltage, a leading lightning network payment provider for stablecoins and Bitcoin, summed up the distinction this way: “Prediction markets can resemble gambling in how users risk capital, but they differ in purpose; they function more like futures contracts by allowing participants to express views or hedge against real world outcomes.”
“The primary risks are insider trading, data abuse and public confusion about what these platforms actually stand for.” – Thomas “Fighter” Feriter, Florida board-certified criminal trial lawyer
He added that regulators often see them as research or forecasting tools instead of entertainment, especially when markets focus on politics or public events. If the industry grows, he believes it will need strict KYC rules, limits on leverage and safeguards against foreign interference in elections.
Florida trial lawyer Thomas “Fighter” Feiter echoed that sentiment. “Prediction markets might sound gambling given that people are betting on outcomes, yet the nature and purpose of the two are dissimilar,” he said, explaining that gamblers bet against the house while prediction market traders buy and sell from each other.
The Fighter Law founder compared prediction markets to financial exchanges and noted that university run markets have long been treated as academic tools rather than games of chance.
Feiter said full legalization would require transparency, position limits and tough identity checks. He warned about insider trading and the risk of confusing the public about what these platforms really do.
Tom Gruca, professor of marketing and director of the Iowa Electronic Market, the first prediction market founded in 1988, also shared his insights with ReadWrite. IEM is part of the University of Iowa’s TIppie College of Business.
“Generally, prediction markets are organized to create a way for information that is widely dispersed across many people to be gathered and summarized into a single forecast,” he said. Unlike gambling sites, prediction markets don’t set odds, traders do.
He noted: “The interesting thing is that the CFTC is supposed to determine if the event contracts it approves are consistent with state laws. I am not sure how the CFTC determines whether the prediction markets are limiting traders to those states where sports betting is legal.”
Gruca said the biggest disruption may hit sports betting. Politics has limited events and only so much off year interest, but sports offer endless contracts every day. And he questioned how sports markets serve the public interest if commercial platforms justify their business by claiming to provide something like poll quality information.
Regulators and tribal groups disagree
Tribal leaders and gaming regulators say that the line has already become blurred. During an Indian Gaming Association webinar, critics argued that prediction markets are using loopholes to federalize gambling and cut out states and tribes.
Attorney Daniel Wallach put it bluntly: “It’s gambling,” he said, pointing out that these platforms let eighteen year olds trade sports contracts even though most gambling jurisdictions require a minimum age of twenty one. He also flagged the lack of responsible gambling protocols or consumer protections.
Victor Rocha of the Indian Gaming Association also warned that prediction markets threaten the foundations of tribal gaming by operating untaxed and unregulated. “They’re moving at breakneck speed,” he said, adding that no one is watching what these companies are doing.
Daniel O’Boyle, a senior reporter at InGame.com, previously told us that the whole space exists in a legal fog. A CFTC regulated contract is technically a derivative, but once it ties to a sports outcome, “it’s obviously gambling.” Sometimes it’s both at the same time.
The American Gaming Association has also blasted the NHL partnership, saying Kalshi and Polymarket operate outside state regulated frameworks and face major legal uncertainty, especially when it comes to “offering sports wagers in all 50 states to anyone 18 years of age.” The association said it undermines state and tribal systems that set 21 as the legal wagering age.
State regulators are regularly evaluating whether their licensed operators are playing by the rules. Many states have laws or regulations that prevent licensed sportsbooks from doing business with gray market or black market operators, suppliers or vendors. If an operator crosses that line, it could lose its license or face a significant financial penalty.
Prediction markets have complicated that picture. These platforms are not operating in a regulatory vacuum. Designated contract markets have to follow twenty three core principles laid out in Section 5(d) of the Commodity Exchange Act. But they are not overseen by state regulators. That has created an awkward situation in which Kalshi, which rolled out props and parlays in September, is competing alongside state licensed sportsbooks in every US market.
For state regulators, there are several tools available through legislation, rulemaking and suitability reviews. At the time of writing, no state has passed a law that explicitly bans prediction markets or defines them as illegal. If such a law were enacted, it would give regulators clear authority to act against licensees that decide to get involved. Ohio is the first state to publicly signal that it views prediction markets as not legal within its borders, although it has not yet written a regulation that formally backs up the warning.
So here we are, with an industry that sits somewhere between Wall Street and Vegas, with traders buying political futures next to bets on hockey goals. Whether prediction markets become the next evolution of information markets or just a slick new form of gambling, one thing we know is that the line between the two is getting harder to see, especially when you can bet on everything from elections to touchdowns to Mamdani’s mayoral prospects. What is clear is that the US will eventually have to choose which framework governs these markets.
Featured image: Canva
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