Online prediction markets allow users to put money on the outcome of almost anything — this weekend’s NBA game between the Warriors and the Thunder, the next supreme leader of Iran, whether the government will confirm the existence of aliens.
But those markets have no state oversight and operate even in states that ban gambling.
The platforms are raising bipartisan alarms, especially related to sports gambling. As states have legalized sports betting in recent years, they’ve required legal sportsbooks to jump through multiple hoops — from age verification procedures to protections for gambling addiction to tax collections. Online prediction markets circumvent all those rules.
Platforms including Kalshi and Polymarket say they are offering contracts similar to commodity markets that speculate on the future price of corn or oil — not outright gambling. But a growing number of states are rejecting those justifications, arguing the platforms are offering a backdoor to skirt state gambling regulations, particularly on sports.
The issue has sparked action from state regulators, new legislation, and lawsuits from both states and prediction markets. Complicating matters are the federal government’s moves to block state regulation of prediction markets, which see more than $13 billion in transactions each month.
Most activity on those platforms revolves around sports. And in national ads, Kalshi even marketed itself as the first national legal sports betting platform — even though states approve and regulate sports gambling since a 2018 Supreme Court decision. In 11 states, sports gambling remains illegal.
“This is sports wagering. If it looks like a duck and quacks like a duck, it’s probably sports wagering, in this situation,” said Kentucky state Rep. Michael Meredith, a Republican.
Meredith, who sponsored a 2023 law that legalized sports betting in Kentucky, called for states to regulate prediction markets during a webinar hosted by the National Conference of State Legislatures. That organization, representing state legislators across the country, has urged Congress “to act swiftly to address the rapid growth of unregulated sports‑related event contracts.”
State leaders argue their longstanding authority to oversee gambling should allow states to regulate or ban prediction market platforms. But those companies maintain they are not beholden to state regulations.
“I think it’s very clear that this authority should be vested in our state governments,” Meredith said last month.
In New York, lawmakers are considering legislation that would ban prediction markets from offering contracts on sports events, in addition to natural disasters, acts of terrorism and deaths. In Nevada, where gambling and tourism are top economic drivers, regulators are involved in a protracted legal fight after the state sought to stop prediction market activity on sports.
“To me, this is clearly gambling,” Thomas Reeg, CEO of Caesars Entertainment, which operates casinos and sports betting, said during a company earnings call in January.
But states are also fighting an obscure federal agency seeking to protect the emerging marketplace. The Commodity Futures Trading Commission, which regulates derivatives such as futures contracts on stocks, has asserted it has “exclusive jurisdiction” over prediction markets and promised to fight state regulatory efforts in court.
The CTFC did not respond to Stateline’s request for comment. Neither did Kalshi or Polymarket, two of the leading prediction market companies.
A new wave of betting
Unless Congress passes legislation, experts say the courts will ultimately decide what role states can play in regulating prediction markets.
The standoff has led to litigation between the platforms and states in at least eight states, and officials in 11 states have sent cease and desist orders to prediction market companies, according to the American Gaming Association, an industry group representing casinos and sports books. A bipartisan group of attorneys general from 39 states and the District of Columbia recently urged a federal court to uphold state authority to regulate sports gambling.
The American Gaming Association says prediction markets should either get out of the sports betting business or follow the same regulations and rules that apply to sportsbooks such as DraftKings and FanDuel.
“They don’t want to pay the taxes, they don’t want to undergo the compliance and provide all of the consumer protections that are required by states of operators who operate legal sports betting,” said Tres York, the vice president of government relations for the association.
The organization estimates states have lost out on more than $570 million in sports gambling tax revenues since prediction markets began offering sports events contracts.
Many state leaders and experts are already concerned about the societal effects from the meteoric rise of sports gambling, which has transformed collegiate and professional sports, and the potential for manipulation by players.
“If you already have what I would call an epidemic of sports betting addiction in this country when you have regulated sports betting, imagine what it’s going to be like when you have essentially unregulated sports betting,” said Benjamin Schiffrin, director of securities policy at Better Markets, a nonprofit watchdog group advocating for consumer and investor financial protections.
The wide range of available bets also is raising alarms over election integrity and insider trading. In addition to individual elections, prediction markets have allowed wagers on the ouster of Venezuelan President Nicolás Maduro and the timing of the U.S. strike on Iran. Last week, hundreds of thousands of dollars were bet the day before the Iranian strikes, and more than 100 accounts cashed in $10,000 or more from successful predictions, according to a New York Times analysis.
“It’s a huge change to all of a sudden allow betting on elections, and it really threatens the underpinnings of our democracy,” Schiffrin said. “It just seems like there’s tremendous potential for wrongdoing.”
On its website, Kalshi says it operates under a “strict regulatory framework” with a suite of market integrity, surveillance, financial safeguards, and anti-manipulation protections.
Federal-state conflict
Citing what it called “an onslaught” of state litigation, the Commodity Futures Trading Commission last month filed a court brief underscoring its authority to regulate prediction markets.
“To those who seek to challenge our authority in this space, let me be clear: We will see you in court,” Commissioner Mike Selig said in a video posted on social media. Selig is the only member of the presidentially appointed commission, which currently has four vacancies.
Utah Gov. Spencer Cox, a Republican, immediately vowed to oppose the federal agency and the prediction platforms in court. Gambling has been banned under the Utah Constitution since the state’s founding, and Cox posted on social media that prediction markets are “destroying the lives of families.”
Kalshi swiftly sued the governor and the state in federal court in anticipation of enforcement efforts and pending legislation in Salt Lake City. The company’s lawsuit cited the governor’s post and a column penned by Republican Attorney General Derek Brown explaining why he joined Connecticut Attorney General William Tong, a Democrat, “in urging Congress to address offshore gambling operations that disregard state law and target young Americans.”
Utah Republican state Rep. Joseph Elison sponsored the legislation cited in Kalshi’s lawsuit. The bill, which has passed both chambers, would expand the state’s definition of gambling to include proposition betting — bets on the performance of an individual player or team that don’t necessarily affect the outcome of a competition. While Elison acknowledged the courts will ultimately determine the issue, he said prediction markets are essentially offering proposition betting without authorization.
”We’re 50 independent sovereigns that gave centralized government to the federal government to do certain things,” he told Stateline. “But the rest, we want those things to be under our purview. And this is one of those.”
The legal landscape
In early rulings on the matter, courts have issued a mix of opinions: States have found initial success in state courts while results have been more mixed in federal courts, said Daniel Wallach, a gaming and sports gambling attorney tracking the issue.
But federal law has long affirmed state authority to oversee gambling, he said.
Despite attempts to cast transactions as investments, Wallach says courts will look at the substance of bets, which he said are almost indistinguishable from those made in state-regulated betting markets.
“The argument that this is investing rather than gambling is essentially elevating form over substance,” he said. “Plain and simple, this is wagering on the outcome of a sporting event.”
Wallach said state efforts such as cease and desist orders are counterproductive, as they essentially invite federal lawsuits from prediction market firms. He said states are better off pursuing gambling enforcement efforts in state courts, where several have won preliminary injunctions halting operations of the platforms temporarily.
For now, he said the federal agency has applied almost no scrutiny of the platforms, noting that the president’s family has a financial interest in the industry.
Donald Trump Jr., the president’s eldest son, has a business interest in two of the largest online prediction markets, and the president’s social media platform Truth Social announced it would start its own prediction market, according to The New York Times.
Journalist Dustin Gouker, who authors newsletters on gambling and prediction markets, noted that the CFTC rules that currently regulate prediction markets were built for financial products — not gambling. He said prediction markets have moved into the gaming market because “nobody said no.”