Commercial prediction market platform Kalshi has begun to address responsible gambling concerns from groups like the American Gaming Association (AGA), but is it enough to quell states’ concerns?
It’s safe to say probably not, as Illinois joins the growing list of states asking Kalshi and other platforms offering sports event contracts to cease and desist.
The American Gaming Association (AGA) has also found these innovations lacking. In a KPMG gaming webinar on Tuesday, AGA vice president of government relations Alex Costello took issue with marketing that pitched event contracts both as wagers and as investment vehicles.
“One of the key components to responsible gaming is that these are supposed to be entertainment,” Costello said. “It’s supposed to be fun. It is not a way to get rich, and so marketing these as investment tools really goes against decades of research in that area.”
AGA doesn't think Kalshi's safeguards are enough
Speculative financial products have always involved gambling, but those risky products have never been as accessible to ordinary people as they have been with the rise of retail investing and event contracts. With the recent mainstream introduction of sports event contracts, problem gaming and sports integrity are coming into focus as key concerns for the AGA and other regulated sports betting industry stakeholders.
“Our members work with integrity monitors that watch not only the betting lines but also plays, calls to make sure that everything is above board and that there’s no undue influence on the outcome of these matches,” Costello said.
Kalshi is actively working on addressing responsible gambling and sports integrity monitoring. On March 24, Kalshi CEO Tarek Mansour announced the platforms’ consumer protection hub, an area of the app and site where customers can set deposit limits, trading breaks, and opt out for set periods of time.
“For sports specifically, we are excited to announce our partnership with @_IC360, whose data will enhance our Customer Protection Hub’s ability to prevent bad actors and report them to the leagues and relevant regulatory bodies,” Mansour wrote on X.
The finance industry has protections of its own too. Kalshi is required to submit daily position reports to its regulator, the Commodity Futures Trading Commission (CFTC). These position reports are one of the derivatives industry’s most fundamental integrity operations. Kalshi also employs fraud engineers to catch suspected financial fraud, another standard practice in the financial industry.
Still, if the CFTC (and the courts) validate the legality of prediction markets for sporting events, it’s likely we will also see more regulatory requirements and oversight of the contracts, similar to what is in place for state-regulated sportsbooks.
Kalshi a betting site or hedging mechanism?
Regarding the fundamental question of whether sports event contracts equate to sports gambling, there is legal precedent setting prediction markets apart. Kalshi rejects the claim that it’s a gambling platform because of the hedging function its product makes available.
To support that argument, Mansour draws on Board of Trade of City of Chicago v. Olsen, a 1923 Supreme Court case that ruled in favor of federally-regulated grain futures. Mansour explained why the gambling activity on Kalshi was a normal part of a derivatives exchange in response to criticisms that Kalshi had become a gambling platform.
Mansour noted that The Chicago Board of Trade had to respond to the same objections about gambling and market integrity that Kalshi has. In 1923, the Chicago Board of Trade argued that while there were many speculators in the new grain markets, “no corners have been run on the exchange for 15 years, due to the enforcement of rules against them by the Board and ‘perhaps to the Sherman Anti-Trust Act’” and “that manipulation has never been successfully resorted [sic] to depress prices.”
Kalshi’s claims that its markets can’t be easily manipulated and does have robust integrity monitoring echo these century-old arguments.
“When insurance…became…democratized, people started using it as a mass product, people were like ‘Oh, you’re gambling on death’ and all these weird things,” Mansour said in an EO interview. “And sure, taking risks to make more money is a form of speculation, but it’s a crucial part to make insurance a product that exists today.”
As the CFTC prepares to hold a roundtable on prediction market policy at the end of April, the balance between the utility of prediction markets and consumer protections from problem gambling risks will continue to be fought over in the courts.
