Prediction markets: A bold new frontier or a shortcut

Prediction markets have garnered a lot of attention over the past couple of months. The 2024 United States presidential election in November was one of the triggers, but there were other events as well that led to these platforms dominating the media news flow.

Kalshi fought against an unyielding regulator in the face of the Commodity Futures Trading Commission and won, and Polymarket made a boastful claim that it had, again, read polling data better than any pollster out there.

What are prediction markets?

Prediction markets have often been accused of offering a form of gambling but the evidence to support this is complex. Many legal experts have refuted such claims, arguing instead that prediction markets operate in a fundamentally different way.

To put it simply, prediction markets are predictions (expressed as shares) that willing participants make about the future. There are no odds set by a third party; rather, everyone who participates sides with one of usually two possible outcomes.

This was illustrated in the 2024 United States presidential election when Polymarket and Kalshi queried their registered users on which party’s candidate would win the White House. Essentially, neither platform set the odds itself.

Rather, participants "vote" by placing fairly small amounts, thereby providing a general idea of public perception. In other words, the argument that prediction markets are gambling falls flat because they function instead as information aggregation tools.

"Kalshi and Crypto.com, by way of being licensed by the CFTC and considered Designated Contract Markets, were always going to be treated differently. Under the current regulations, the event contracts that Kalshi and Crypto.com are offering must have utility as hedging tools. Therefore, it is hard, under this regulatory framework, to imagine they could, in any meaningful way, replicate the multitude of products offered by sportsbooks, so I doubt there is too much panic from the established operators," said Jeevan Jeyaratnam, Chief Betting Officer at Abelson Sports.

Prediction markets, in other words, operate like financial markets, where participants trade shares, and these shares’ prices and values fluctuate based on the perceived outcome. All of this is driven by the available evidence generated through these trades rather than a centralized entity setting the odds.

Prediction markets: Are they legal?

The legality of prediction platforms is not a cut-and-dry issue and there are surrounding details that are important to recognize. In the United States, they have been recognized as legal, especially under the administration of President Donald Trump. His son, Donald Trump Jr. is even an advisor to Kalshi, one of the platforms that made it all happen.

"The appointment of Donald Trump Jnr to the Kalshi advisory group, as well as the President’s meeting with the Crypto.com CEO in Mar-a-Largo, is perhaps a signal that the new administration is open to embracing such businesses," Jeyaratnam, explained adding:

"This isn’t that surprising, the CFTC, a federal government agency, earns its money via fees paid to it by its regulated members. President Trump may well view that revenue more favorably than the state level taxation that the repeal of PASPA created," Jeyaratnam added.

At first, Kalshi traded heavy blows with the Commodity Futures Trading Commission (CFTC). In 2023, Kalshi sought to first offer contracts on who would end up controlling Congress.

The platform was stopped in its tracks by the CFTC, which failed to produce a definitive answer and put the issue on the back burner. Kalshi, however, went on the offensive and eventually won a court reprieve, with a judge siding with the platform and allowing it to go ahead with political event contracts.

Although the CFTC contested this decision, a court of appeals upheld the previous ruling, settling the matter in favor of the company. The arrival of the new administration sent a clear sign that prediction markets are here to stay.

However, Kalshi is not the only prediction market to have had run-ins with the law. Not all of the platform’s markets have been allowed, however. A controversial market on the future of Luigi Mangione, the presumed killer of UnitedHealth CEO Brian Thompson, was discontinued at the order of the CFTC.

On the other hand, Polymarket, a platform that gave Donald Trump a 60% chance to win the presidency, has had a slightly more turbulent relationship with the government.

The platform did have its owner’s apartment raided by the Federal Bureau of Investigation and was tied to a supposedly French trader who moved huge volumes of cryptocurrency and gave the Republican candidate a strong boost in the market.

Despite all, however, Kalshi has remained embedded in the United States while Polymarket exited in 2022 after it caved into regulatory pressure, reaching a settlement with the CFTC and paying $1.4m.

The platform is planning a potential return and offering products to US customers once again. However, it has recently faced more scrutiny from the regulator over whether it had allowed US-based residents to access and use its platform.

Coinbase has hailed prediction markets as a great opportunity, too. A Kalshi spokesperson told Casino Guru News that the company was confident in the staying power of prediction market platforms:

"The future of prediction markets is bright. Event contracts can become a trillion-dollar asset class, and Kalshi is committed to making that vision a reality."

Legality around the world

Although prediction markets have largely been left alone in the United States, their experience elsewhere has been quite different. Polymarket, in particular, has faced regulatory challenges in several jurisdictions over the last couple of months. The platform has been out of the United States since 2022, but it still had an outsized impact on the Presdential election, as noted by Jeyaratnam:

"It came as little surprise that the unregulated Polymarket has been banned in France, Singapore and the USA, all of which operate highly regulated betting markets. One of the alleged "whales" from the multi-billion dollar US Presidential Election market was apparently a French citizen; there was little chance the French government would let that pass without taking action."

The platform chose to exit the market in France after it attracted scrutiny from the local gambling regulator, the ANJ, and it was outright outlawed as an illegal gambling website in both Belgium and Singapore.

Despite these rulings, Polymarket is not recognized as an illegal gambling platform in the United States or in many other jurisdictions for that matter. Kalshi has remained fairly focused on the United States in the meantime.

These are just some of the most prominent cases that have attracted sufficient coverage internationally, but the legality of prediction markets is not carved in stone and is subject to local laws.

The core difference mostly has to do with the wording of the specific law. For example, the United States largely stipulates that only chance-based events fall under this category whereas prediction markets are information aggregators.

Prediction markets are here to stay

With the CFTC failing to rein in these markets, and further qualify them as gambling, chances are that predicted markets are here to stay. The current administration in the White House does not object to prediction markets and is in some ways connected to the market, mostly through the son of the current President of the United States.

However, there are compliance challenges to address, as noted by Xpoint CEO Manu Gambhir:

While prediction markets offer an exciting new option for consumers, platforms, gaming regulators, and bodies such as the CFTC are actively working to understand and develop the necessary regulations and requirements these new platforms must adhere to. In addition to KYC and AML protocols, prediction markets are paying close attention to geolocation requirements, as they must comply with the laws of the various jurisdictions where their services are offered. This necessitates the implementation of market-leading geolocation technologies to ensure compliance.

Prediction markets are already offering their users the opportunity to make a prediction on whether President Donald Trump will inspect Fort Knox’s gold reserves by May 2025.

Kalshi is also running Oscar markets, including Best Picture, which has accumulated more than $4.5m in trades at the time of writing and Best Actor, which has Adrien Brody and Timothee Chalamet vying for the top spot.

What this means is that Kalshi and Polymarket are likely to bring in a host of possible markets that users can, for want of a better word, bet on. They are not the only ones who want in on the action.

Robinhood CEO Vlad Tenev has similarly expressed high hopes for the market. Neither platform needs to gain ground abroad as the country already provides a sufficiently saturated and large market and has much to offer in terms of possible prediction races, with election betting an important part of what these platforms do. Their future looks promising, to say the least.

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