Are Kalshi and Polymarket Turning Prediction Markets Into Online Gambling?

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Prediction market regulation is quickly becoming one of the biggest legal fights in the financial sector, with U.S. states and federal regulators at loggerheads over who calls the shots on platforms like Kalshi and Polymarket.

The industry has grown, exceeding a monthly trading volume of over $20 billion and has since moved beyond just politics and crypto speculation into economics, sports, and even private-company forecasting. 

However, the rapid growth has also brought a fundamental question to the fore: are prediction markets just legitimate financial instruments, or simply gambling platforms trying to hide behind a fancy label?

CFTC And States Go Head-to-Head Over Control

The battle over prediction market regulation has intensified this week, after the CFTC sued Minnesota over its new statewide ban specifically targeting prediction market operators like Kalshi and Polymarket.

Minnesota is the first U.S. state to make it a crime to run, host, or promote these kinds of markets and the law is set to kick in on August 1st.

The CFTC now says that Minnesota is overstepping its authority, because these prediction markets fall under federal commodities regulation, through the Commodity Exchange Act.

Several states disagree. Nevada, Ohio, Maryland, Arizona, Connecticut, Illinois, and New York have all gone after prediction market operators with lawsuits, cease-and-desist orders, or enforcement actions.

Court rulings have also split sharply

New Jersey courts sided partially with Kalshi earlier this year, ruling that federal commodities law can override state gambling restrictions on CFTC-approved operators. Meanwhile, courts in Nevada and Maryland backed state authority over gambling oversight.  

That growing conflict is why legal analysts increasingly expect the issue to land before the Supreme Court.

The main dispute is simple but highly consequential: should event contracts tied to elections, sports, or economic outcomes be treated like derivatives markets or gambling products?

Prediction Markets Are Bursting Into Institutional Finance

This whole debate over prediction market regulation has become a lot more important, because the sector has been moving fast beyond just retail speculation.

Polymarket recently teamed up with Nasdaq Private Market to launch prediction markets tied to pre-IPO companies, letting traders bet on valuations, IPO timelines, and the performance of private companies. They have also expanded partnerships with the NYSE, Google and Yahoo Finance.

Supporters argue this transforms prediction markets into a real-time information layer for financial markets.

Federal Reserve researchers have reportedly described prediction markets as useful benchmarks for economic expectations, particularly around inflation, tariffs and interest-rate forecasts.

Ford has also previously used internal prediction markets to try and forecast vehicle sales, producing error rates roughly 25% lower than traditional expert models, according to Kuvi.ai CEO Dylan Dewdney.

ARK Invest CEO Cathie Wood recently called prediction markets “a powerful new layer of financial infrastructure” after Kalshi’s latest funding round.

Institutional investors are also starting to get into the space. According to S&P Global, the likes of Sequoia Capital, Paradigm, Jump Trading, DRW and Susquehanna have become involved in the liquidity operations of Kalshi and Polymarket.

This institutional participation is important because as markets get more liquid, prediction accuracy improves.

Bitwise adviser Jeff Park recently argued that if prediction markets are going to become really reliable forecasting tools, then there is a need for institutional investment. 

Critics Argue Prediction Markets Are Still Just A Form Of Gambling

Despite the industry’s push toward financial legitimacy, critics insist that prediction markets regulation should remain under gambling laws.

Sports and political event contracts currently dominate open interest across Kalshi and Polymarket, with roughly $900 million concentrated in those categories alone.

That has only added weight to the arguments of gaming regulators and addiction experts who say these platforms work like sportsbooks.

Adam Bjorn, the CEO of Plannatech, the betting operator, has put it bluntly:

“These are 100% gambling platforms”

He says that calling them “event contracts” or “commodities” doesn’t really change the fundamental business model.

There are also rising concerns around gambling addiction.

Kalshi recently pledged $2 million to the National Council on Problem Gambling as criticism intensified over the behavioral risks tied to prediction trading.  

Addiction experts and public health advocates are warning that sports based prediction contracts look more and more like traditional online betting products, especially among younger users.

The CFTC itself now appears to recognize the growing risks.

They are reportedly considering a framework that would cover issues like insider trading, market manipulation and market integrity protections for prediction markets.

This week, the agency reportedly signed new integrity agreements with the NHL as sports event contracts continue to grow in popularity.

The Supreme Court Could Decide What Happens Next

If the federal courts ultimately decide in favour of preemption, then Kalshi and Polymarket are likely to be able to expand nationally under a single, unified regulatory framework controlled by the CFTC.

That would likely mean an increase in liquidity, a deeper market and a quicker integration with traditional financial products.

If on the other hand the states retain the authority, then the industry could fracture into a system where prediction markets are either banned or restricted depending on jurisdiction.

That would create a huge liquidity risk for these platforms that rely on nationwide participation.

Conclusion

The CFTC and several U.S. states are at odds over where Kalshi and Polymarket fit in. Some see the platforms as a valuable tool for forecasting economic trends and making markets more efficient. Critics see them as a way for people to gamble on outcomes.

Now, it’s up to the courts to decide whose interpretation is right. With conflicting rulings already emerging across states, the final answer may ultimately come from the Supreme Court.

Glossary

CFTC: The US body responsible for overseeing the derivatives markets.

Prediction Market: A trading platform where users speculate on future event outcomes.

Federal Pre-emption: A legal concept where federal law overrides conflicting state laws.

Open Interest: The total value of active contracts in a trading market.

Frequently Asked Questions About Prediction Markets

What are prediction markets?

Prediction markets let users buy and sell contracts on the outcome of future events like elections, sports games or big economic decisions.

Why are states trying to shut down Kalshi and Polymarket?

Some states argue that because of the way the platforms are structured, they fall under their state laws and are effectively unlicensed gambling operations.

What is the CFTC saying?

The CFTC says that because prediction markets are a form of commodity trading, they need to be regulated at a federal level and cannot be controlled by individual state authorities.

Why do institutional investors care about prediction markets?

Some big investors use prediction markets as a way to gauge what’s going on in markets in real time, get a read on how people are thinking, and generally get a better idea of what’s likely to happen.

References

Reuters

The Guardian

SPGlobal