Surging prediction markets face legal backlash in US: ‘Lines have been blurred'

Core Viewpoint - The rapid growth of prediction markets in the US is facing significant legal challenges, with lawmakers and regulators arguing that these platforms are essentially gambling operations disguised as financial exchanges [1][6]. Industry Overview - Prediction markets allow users to trade on various outcomes, including sports and elections, by betting against one another rather than against a house, with platforms collecting transaction fees [3]. - Kalshi reported over $1 billion traded on Super Bowl Sunday and nearly $10 billion in January, primarily related to sports [2]. Regulatory Landscape - Prediction markets are classified as "event derivatives" and are regulated under federal commodities law by the CFTC, allowing them to operate in all 50 states for users aged 18 and older [4]. - In contrast, licensed sportsbooks are restricted to states where sports betting is legalized and must comply with various consumer protection regulations [5]. Legal Challenges - At least 20 federal lawsuits have been filed, with states arguing that prediction markets evade state gambling laws and taxes [1][6]. - New York's gaming commission ordered Kalshi to cease operations related to sports contracts, leading to legal challenges from the company [8]. Political and Legislative Actions - Several states are advancing legislation to regulate or ban prediction markets, with proposals to restrict participation to individuals over 21 [16][26]. - The CFTC has faced pressure from lawmakers to not override state laws regarding sports betting [25]. Industry Response - Companies like Kalshi and Polymarket assert that they are regulated futures exchanges and not gambling operators, emphasizing the need for consistent national oversight [7][14]. - Both companies have implemented measures to monitor for insider trading and market manipulation, claiming adherence to standards similar to those of traditional exchanges [19][20]. Broader Implications - The debate over prediction markets raises questions about the commoditization of human events and the potential for insider trading, as highlighted by concerns from state representatives [17][32]. - Advocacy groups are calling for regulations that prioritize player health and safety, likening the risks of prediction markets to traditional gambling [29][30].