The prediction market faces a comprehensive crackdown

Author: David Christopher Source: Bankless Translation: Lee, Golden Finance

In recent weeks, the prediction market has been in a very difficult situation.

Major trading platforms have repeatedly faced negative public opinion, with the core issue being the difficulty in preventing insider trading, which is continuously eroding market credibility. The U.S. Senate has just introduced a ban, completely prohibiting senators from betting and trading on prediction platforms. Meanwhile, the governors of Illinois, New York, and Maryland have also issued orders banning their state officials from using such platforms for trading. Prior to this, the U.S. Department of Justice had already sued an Army sergeant, accusing him of using confidential intelligence to place bets on Polymarket and profiting over $400k.

States are also continuing to target the most profitable sports betting businesses in prediction markets. Wisconsin’s Attorney General has sued five related platforms on grounds of unlicensed gambling; New York’s Attorney General has filed lawsuits against two platforms citing the same legal principles, and, together with the attorneys general of 38 other states, supports Massachusetts’ lawsuit against the Kalshi platform.

Although platforms like Kalshi and Polymarket have fought back, the results have been mixed. Critics point out that these platforms are essentially no different from traditional sports betting, merely exploiting regulatory gaps between federal oversight and state gambling laws. To unlock the industry’s huge growth potential, prediction markets must not only win current legal battles but also change public perceptions of their trading fairness.

Sports Events Become the Mainstream

The 2024 U.S. presidential election has demonstrated the potential of prediction markets worldwide, and now sports betting has become the primary entry point for ordinary users to participate in prediction markets.

Kalshi’s platform saw trading volume surpass $230 billion in 2025, with about 86% of transactions related to sports events. Reports indicate that in the first quarter alone, Polymarket’s sports betting volume reached $10 billion, making the sports sector the platform’s most popular category.

As the industry’s trading scale skyrockets, it has also gained deep recognition from mainstream institutions.

The growth prospects of sports prediction markets have always been a key focus for capital; Kalshi and Polymarket have already raised billions of dollars in venture funding.

In October 2024, the National Hockey League (NHL) signed multi-year cooperation agreements with two platforms; the following month, the Ultimate Fighting Championship (UFC) also reached a partnership. In January 2025, Major League Soccer (MLS) partnered with Polymarket; in March, Major League Baseball (MLB) signed an exclusive three-year deal with the platform, with a maximum value of $300 million. It is also reported that the National Basketball Association (NBA) is actively negotiating cooperation with these two platforms.

Legal Battles Are Inevitable

Prediction markets are deeply embroiled in jurisdiction disputes between federal regulators and state governments. Sports betting is regulated by states, while financial swaps and derivatives are overseen at the federal level. The core controversy revolves around whether Kalshi and Polymarket’s sports contracts should fall under one regulatory category or another. Platform operators claim their products are financial swaps, while many state governments argue they are simply disguised sports betting.

Kalshi’s contradictory legal claims further complicate the situation. As early as 2023, when the Commodity Futures Trading Commission (CFTC) attempted to halt election prediction markets, Kalshi argued that elections are not “gambling games” because they are not sporting events; at that time, the company also acknowledged that football games fall under gambling. Now, it has reversed its previous stance, and states are repeatedly citing its past statements in court, pointing out the inconsistency.

The key legal issue hinges on a core definition in the Dodd-Frank Act: financial swap products must be anchored to real financial, economic, or business outcomes. Kalshi claims that events like the Super Bowl meet this standard because they influence hundreds of billions of dollars in advertising, tourism, and related merchandise. However, states counter that this interpretation grossly distorts the law’s original intent; if the Super Bowl can be classified as a financial derivative, almost all social events could be forcibly categorized as such.

While prediction markets have not yet fully replaced traditional sports betting, data shows they are steadily squeezing the survival space of traditional gambling companies.

Currently, courts at all levels have yet to reach a unified conclusion on this legal definition. In early April 2024, the highest court handling prediction market cases—the U.S. Court of Appeals for the Third Circuit—ruled in favor of Kalshi. Soon after, the same-level U.S. Court of Appeals for the Ninth Circuit held a hearing that is likely to produce an opposite ruling.

Disagreements among appellate courts often lead to cases being appealed to the Supreme Court. However, even if the Supreme Court intervenes, it may not deliver a definitive ruling: the core dispute is about the interpretation of legislative language, and Congress can always amend the law, with legislative efforts already underway.

Recently proposed legislation, the “Prediction Market Gambling Clarification Act,” aims to tighten the definition of financial swap products, explicitly excluding sports and event-based contracts. If enacted, all current legal battles would become moot. Under the current relatively friendly government stance, whether this bill will pass remains uncertain. Meanwhile, predictions on Polymarket about “whether a sports prediction market ban will be enacted in 2026” currently have only an 11% probability of occurring.

If Congress delays legislative action, the case will likely ultimately be decided by the Supreme Court. If platforms win, most state lawsuits will lose their basis; if they lose, platforms will have to operate under each state’s gambling regulations, which is difficult.

The reality is that even winning a Supreme Court case does not guarantee permanent stability. If Congress changes hands and adopts a tough stance on prediction markets, it can revise the definition of financial swaps again. The last resort for platforms would then be to file constitutional challenges, claiming the relevant laws are unconstitutional and beyond Congress’s legislative authority—but this path is extremely difficult.

Even if the current administration publicly supports prediction markets, the industry’s future remains fraught with challenges.

Gaining Public Support

Amid many legal disputes, the core advantages of prediction markets are often overlooked by the public.

The original intent of state gambling laws was to protect consumers from being long-term exploited by platform-designed rules. Prediction market prices are formed through peer-to-peer transactions among users, with platforms merely facilitating trades. While platforms can earn substantial profits from high trading volumes, their underlying trading mechanisms mean ordinary users are not competing against deliberately manipulative institutions that aim to harvest their funds.

However, this logic is hard to convince the public: most people already believe that such disguised betting activities should be more strictly regulated, and they often criticize the tolerance of speculation in prediction markets. Coupled with widespread distrust of Wall Street and the crypto industry’s fairness, and frequent insider trading scandals, more and more legislators are turning to regulate these platforms as a populist political move.

Although the underlying model of prediction markets differs from traditional sports betting, this subtle difference is less important than the public’s ingrained perceptions. The long-term development of the industry largely depends on whether it can clearly communicate to the public and regulators the fundamental differences between prediction markets and traditional gambling.