The prediction market industry is beginning to resemble the sports betting industry. Regulations haven’t caught up with the products that prediction market platforms offer. Manifold, a free-to-play social prediction platform, has expanded into sweepstakes, an increasingly popular format that has drawn pushback from regulators. Decentralized platforms like Polymarket are prohibited to serves American customers, but millions of American dollars flow to the site anyway.
Recently, the CFTC chairman suggested that state gambling authorities should govern prediction markets that offer election betting.
In a Sept. 25 CNBC interview, the CFTC chairman, Russ Behnam noted that in some foreign countries, election betting is “legal and it’s sanctioned under gambling laws.” Behnam went on to say “if there is really a strong demand for this, then…I think it’s…best suited in a sort of gambling structure as opposed to a financial market regulatory exchange.”
One of the most specific recommendations came near the end of the interview:
If there is a real strong demand and desire to do this, then we should think about it at the state level. Elections are largely handled at the state level, and like I said, in the U.K., this is sanctioned under gambling. We should do the same if that is really what people want.
That’s no longer an option for the CFTC. On Wednesday, Oct. 2, the D.C. Circuit lifted the stays preventing Kalshi from offering its congressional control markets. Ironically, the CFTC wanted to use its authority to oversee election betting just a few years ago.
When the CFTC shut down election betting in WV
In April 2020, the West Virginia Lottery gave FanDuel the authority to offer election betting, only for state officials to shut the markets down within about an hour. The CFTC played a role in the swift closure.
Jeff Ifrah, a top online gaming lawyer, noted that “the CFTC had indicated that they believed that election betting was exclusively within their domain.” Even though a state regulator had approved the contracts, the federal regulator overruled it.
The CFTC can bring enforcement actions against any company that offers futures contracts. For example, in 2019, the CFTC filed a complaint against William Caniff, an Ohio resident who offered investors two pools to trade in foreign exchange binary options. Two criminal cases stemmed from the CFTC’s enforcement action.
Regardless of the type of futures contract – even if it’s an election wager – the CFTC can step in to regulate or prohibit it. The CFTC prohibits futures on regulated exchanges that involve gaming, which is why sports wagers are covered under state gambling laws rather than federal financial law.
Allowing states to decide whether to offer election wagers would mirror the approach used to regulate sports betting, but prediction market platforms believe the CFTC is the appropriate regulator.
Kalshi sued the CFTC to allow congressional control markets, which offer “shares” on which party will control the House and Senate. During oral arguments before the D.C. Circuit Court, the CFTC argued that it shouldn’t accept the role of election investigators as part of its regulatory duties if election markets were to go live. The Circuit Court’s ruling in favor of Kalshi makes the CFTC an election betting regulator.
If the CFTC believed the election bets were gaming, then they really should not have told West Virginia to take them down because that would be within the purview of the state since it’s a state gaming issue,” Ifrah said. “But that’s not what they did. They actually told West Virginia they had preempted the field of election betting and that’s why they were taken down.
Differences between sports betting and prediction market industries
The prediction market industry is in a state of limbo similar to the sports betting industry before PASPA’s repeal. However, there are important differences between the two:
- The prediction market industry lacks a clear regulator
- Some prediction markets have legal market access to all 50 states
- Prediction markets offer legitimate hedging functions that crossover with finance and gambling
On the one hand, prediction markets seem poised to compete with companies in the gambling industry and disrupt speculative finance. On the other, the American prediction market industry had more to lose if it couldn’t turn to the CFTC as a regulator.
Prediction market industry’s multiple regulators
State and federal laws and regulations are clear that sports betting is a form of gaming that belongs to the gambling industry. In contrast, prediction markets can be housed within the gambling or finance industries. That means some prediction markets could be overseen by state gambling regulators while other prediction market companies are overseen federally by the CFTC.
The CFTC is the better option for the prediction industry. A federal regulator would give prediction market platforms legal access to the entire United States. Prediction markets wouldn’t have to spend money on lobbyists to open one state jurisdiction at a time. A federal regulator would also offer one set of regulations for prediction markets to shape their businesses around.
“There’s always been a movement to try and get the CFTC, the federal regulator, to essentially take over oversight of election betting notwithstanding the fact that there were criminal prohibitions in a lot of the states,” Ifrah said.
For example, the CFTC allowed PredictIt to launch with a no-action letter in 2014. The no-action letter was issued by a member of the CFTC staff which declared the agency would not pursue enforcement against PredictIt if it offered its election markets to Americans.
PredictIt has low dollar limits, which attract casual traders and bettors, making it more entertaining and educational than a profitable trading platform. Earlier this week, the Predictit CEO, John Phillips went on CBS Mornings to talk about presidential election betting.
The CFTC revoked PredictIt’s no-action letter in 2022. PredictIt remains in litigation with the CFTC to force it to justify revoking its previous no-action letter. The CFTC seems to be trying to wash its hands of election betting platforms, but the D.C. Circuit of Appeals decision has made the CFTC the country’s premier election betting regulator.
However, the gambling industry isn’t a perfect home for prediction markets, either.
Gambling regulators’ crackdown on sweepstakes
Manifold, formerly Manifold Markets, started as a free-to-play prediction market platform. Users could create their own markets, and the platform ran on a fictional free currency.
In September 2024, Manifold launched new sweepstakes markets. These markets would trade in a premium currency that could be redeemed for real money. Customers can buy premium currency alongside Manifold’s free currency packs.
Manifold has made this move into sweepstakes at a perilous time for sweepstakes companies. In January 2024, the Michigan Gaming Control Board sent cease-and-desist letters to two sweeps companies that operate the brands Stake.us and Luckyland Slots. On Oct. 1, 2024, Luckyland Slots and Chumba Casino exited Connecticut after receiving cease and desist letters in February.
The sweepstakes casinos and social games industry has formed a trade group, the Social and Promotional Gaming Association (SPGA). One of its members, Fliff, is reportedly raised $12 million in its Series A round. Earnings+More reported that Fliff could be worth $300 million.
Manifold’s new sweepstakes model allows it to access all 50 states without having to apply for state gambling licenses or become a registered derivatives exchange. The sweepstakes model is lucrative, but with hostile regulators and gambling lobbying groups, the reluctant CFTC may make it preferable for new prediction markets to gravitate away from sweepstakes or gambling.
Prediction markets' federal market access
One of the most obvious benefits prediction markets enjoy over sportsbooks is federal market access. Finance companies like Kalshi and ForecastEx are regulated by the CFTC. Both companies are legally available to American customers and can access all 50 states without lobbying.
Alternatively, some prediction platforms may operate offshore to avoid regulation altogether.
Many traders are flocking to Polymarket instead of regulated alternatives. Kalshi and Polymarket both offer a market on whether the New York Times will settle its Open AI lawsuit by the end of 2024. Kalshi’s trade volume is just under $7,000. Polymarket’s is about $17,500. Trading volume in Kalshi’s market on the number of Fed interest rate cuts is about $5.4 million to Polymarket’s $14.6 million.
Polymarket traders have bet over $1.1 billion on the US presidential election outcome, while Kalshi has spent most of the 2024 election cycle suing to offer election markets.
Unlike their sports betting counterparts, prediction markets make their order books public, revealing the large discrepancy between regulated and unregulated market trading volume..
Useful financial functions of prediction markets
Kalshi was founded to allow institutional traders to hedge risk against events. Derivatives can be used as insurance instruments. For example, a farmer can buy futures on the price of corn to get a guaranteed payout if the price drops too low or the season’s harvest yields less product than originally planned.
Kalshi’s founders took the logic of derivatives in agriculture and on other commodities to its logical conclusion. The founders reasoned that if farmers can hedge against the uncertainties of their growing seasons, then ordinary people should be able to hedge against events that affect their finances, like hurricanes or interest rate changes.
A prediction market’s price also reflects the probability that an event will occur. ForecastEx was founded in part to bring long-term thinking to emerging economies. Encouraging traders to put their money on what they think will happen in several years allows the group of traders to see what the whole group believes about future interest rates or unemployment figures. Prediction markets offer a snapshot of group opinion, making it a useful way to view an informed consensus.
Sportsbooks offer price discovery, but their odds don’t always translate to the most efficient probabilities. The added “vigorish” makes it difficult for anyone break even, much less win, long term. Sportsbooks’ steep fees are one reason Sporttrade, the only licensed sports betting exchange in the United States, is so innovative.
However, Sporttrade limits its markets to sports wagers and doesn’t branch out to other events. It has made its home in the gambling industry by only offering markets on games and traditional sports wagers, from moneylines to futures to player props. In contrast, the prediction industry is focused on offering markets on everything except sports outcomes – except for Polymarket, which already has a market on the 2025 Super Bowl winner.
The prediction industry's crossroads
Prediction market platforms are straddled between the gambling and finance industries. Since about a dozen states still prohibit sports betting, the CFTC offers a more attractive regulatory path for prediction markets that want to operate legally. The prediction market industry’s nationwide access is a vital perk that the sports betting industry lacks.
The CFTC doesn’t want to exercise its authority over election markets, but a federal appeals court has decided that the CFTC must allow Kalshi’s election markets. The CFTC didn’t want the role of election betting regulator, but that’s the role it must now play.
Some prediction market platforms, like ForecastEx and Kalshi, chose to become regulated derivatives exchanges. Others, like Manifold, are leaning into the sweepstakes model. Platforms like Polymarket and B.E.T. Drift are built on Web3 and are unregulated platforms that trade in cryptocurrencies.
Compared to the sports betting industry, the prediction industry may be better positioned for long-term acceptance and growth.
And like the sports betting industry, the prediction industry’s future hinged on a court case that answered key regulatory questions.
