Prediction markets mainstream as supreme court fight looms

Prediction markets have deep historical roots, evolving from informal bets in ancient Greece and 17th-century Amsterdam to more formalized commodity futures markets like those at the Chicago Board of Trade. The term 'prediction market' itself was only officially coined in 2004, despite centuries of political and economic wagering, such as 18th-century London coffeehouse bets and 19th-century New York off-exchange presidential prediction markets. Early academic experiments, notably the Iowa Electronic Markets (IEM) launched in 1988, pioneered the institutional use of prediction markets with CFTC approval for research trading in the early 1990s, demonstrating predictive accuracy that often outperformed traditional polls. Meanwhile, early commercial platforms like TradeSports and Intrade, founded in 1999, gained prominence but faced significant regulatory challenges, culminating in the CFTC lawsuit against Intrade in 2012 and its shutdown in 2013. These developments underscore the longstanding tension between innovation in prediction markets and the evolving regulatory landscape.

A critical early regulatory milestone was the U.S. Commodity Futures Trading Commission’s (CFTC) classification of prediction markets as commodities rather than gambling instruments, exemplified by projects like Kaishi. This reframing aligned prediction markets with established financial instruments such as futures on corn, soy, and oil, fundamentally shifting their perception and legitimizing them as financial markets rather than mere betting venues. Unlike traditional gambling, these markets operate on a peer-to-peer basis without a central 'house' profiting from participant losses, functioning similarly to futures markets on currencies or commodities. This distinction has been pivotal in enabling platforms to navigate ambiguous legal environments and seek regulatory acceptance.

Kalshi’s journey epitomizes the regulatory hurdles faced by prediction markets aiming for legitimacy within the U.S. federal framework. Founded in 2019 with a deliberate strategy to operate legally, Kalshi spent four to five years obtaining a rare federal license for an exchange and clearinghouse—licenses notoriously difficult to secure and operate, akin to banking licenses. Their approach contrasted with the Silicon Valley norm of 'ask forgiveness rather than permission,' instead engaging in an iterative regulatory process with the CFTC to find a 'regulatory market fit' for a novel product lacking traditional financial underlyings. By 2022, Kalshi achieved regulated status, and after winning a landmark election-related lawsuit in late 2024, it experienced rapid growth, becoming the first prediction market approved at scale with every contract individually filed and subject to 24-hour regulatory review.

Despite federal regulatory progress, prediction markets continue to face complex legal challenges at the state level and from competing regulatory regimes. Kalshi has been embroiled in litigation initiated by certain states reflecting divergent views on gambling versus federally regulated hedging markets, highlighting the fragmented regulatory environment. Meanwhile, other platforms like Polymarket have adopted offshore operational models similar to Binance to circumvent stringent U.S. regulations, illustrating the tension between regulatory compliance and market growth. Lessons from crypto regulation suggest that strict adherence to bureaucratic rules may be frustrating and potentially ineffective for prediction markets seeking legitimacy, underscoring the ongoing struggle to balance innovation, legality, and expansion.

The regulatory battleground over prediction markets has escalated into a fierce federal-state showdown, with the Commodity Futures Trading Commission (CFTC) asserting exclusive jurisdiction under the Commodity Exchange Act (CEA) against state authorities who classify these markets as gambling under local laws. This conflict crystallized in late 2025 when the CFTC blocked Arizona’s criminal prosecution of Kalshi, a leading prediction market operator, underscoring the jurisdictional tug-of-war over whether event contracts are federally regulated derivatives or state-controlled wagers tied to sports betting revenues. The dispute is not merely academic; it involves substantial state interests, including revenue from sports betting and tribal gaming, intensifying the stakes and fueling contradictory court rulings even within the same judicial districts, thereby amplifying legal uncertainty and pushing the issue toward inevitable Supreme Court review.

By early 2026, the CFTC, under Chair Mike Selig’s aggressive leadership, transitioned from regulatory enforcement to active litigation, suing multiple states—including Wisconsin, Kentucky, and Minnesota—to defend its claim of exclusive federal authority over prediction markets. This unprecedented federal assertiveness, which includes threats to sue any state attempting to regulate or ban these markets, reflects a broader constitutional federalism debate about state versus federal regulatory power. The CFTC’s stance is bolstered by its interpretation of prediction markets as exchange-traded derivatives subject to oversight akin to oil futures, while states, particularly those led by Democratic attorneys general, push back by framing these markets as illegal gambling operations that threaten state tax revenues and social policy objectives.

The intensifying legal battles have produced a patchwork of conflicting rulings and lawsuits across at least sixteen states, involving major platforms like Kalshi, Polymarket, and Coinbase, with some states issuing criminal charges and others imposing taxes on sports prediction market revenues. Kalshi’s strategic choice to pursue full federal regulation, including securing a federal license for an exchange and clearinghouse after a protracted multi-year process, contrasts with states’ attempts to enforce gambling laws, leading to high-profile cases such as Arizona’s 20-count criminal indictment against Kalshi and New York’s lawsuit against Coinbase and Gemini. These disputes underscore the sector’s fragmentation and the growing likelihood that the Supreme Court will soon intervene to clarify whether prediction markets fall under federal derivatives law or state gambling statutes, a decision that will decisively shape the industry’s future.

Amid this regulatory maelstrom, the CFTC has shifted from outright bans toward a rulemaking approach that emphasizes market integrity, transparency, and self-regulation, withdrawing controversial 2024 proposals that sought to prohibit political and sports-related event contracts. The agency’s Advanced Notice of Proposed Rulemaking (ANPRM) and public consultations signal a move to formalize a federal framework that balances oversight with innovation, even as states continue to resist federal preemption. This evolving regulatory posture, coupled with the sector’s rapid growth—Kalshi and Polymarket combined reached $18.6 billion in monthly volume in early 2026—and the entry of major players like DraftKings filing event contracts with the CFTC, highlights the high stakes of the jurisdictional conflict and the urgency for definitive legal clarity, likely to be delivered by the Supreme Court within the next two years.

Prediction markets have undergone explosive growth since early 2024, with trading volumes skyrocketing from under $100 million monthly to over $13 billion by late 2025, and weekly volumes reaching as high as $6 billion by mid-2026. This surge is fueled largely by sports betting markets, which dominate liquidity due to their frequent, clearly defined outcomes, exemplified by the $1.33 billion wagered on the Super Bowl alone—ten times Vegas’s volume for the event. Platforms like Robinhood, controlling 35% of U.S. prediction market volume and generating 11% of its revenue from these markets by Q3 2025, alongside Polymarket and Kalshi, have been central to this growth, attracting institutional giants such as Jeff Sprecher’s Intercontinental Exchange with a $2 billion investment and high-frequency traders like Jump Trading and Susquehanna entering the fray.

Institutional adoption of prediction markets is accelerating rapidly, transitioning from mere data consumption to integration and nascent risk transfer, as major financial firms including Goldman Sachs, Tradeweb, AQR, and Interactive Brokers actively engage with these platforms. This evolution is underscored by Kalshi’s strategic regulatory compliance and growth—achieving an 11x revenue increase in six months and a $22 billion valuation backed by a $1 billion financing round—and by DraftKings’ recent filing of event contract templates with the CFTC, signaling a shift toward federally regulated event contracts. Despite regulatory hurdles and state-level legal challenges, institutional appetite remains robust, with firms envisioning dedicated trading desks anchored in prediction market contracts and expanding beyond sports into macroeconomic, political, and entertainment sectors.

Product innovation within prediction markets is marked by diversification and technological integration, moving well beyond traditional election and sports betting contracts into ETFs tracking political outcomes, perpetual futures, margin trading, and commodities such as metals, FX, and energy. Pioneering firms like Roundhill have filed ETFs based on event contracts that incorporate sophisticated risk management mechanisms, while platforms like Polymarket and Kalshi embed markets directly into consumer apps, media outlets, and brokerages, enhancing accessibility and liquidity. The infusion of blockchain and AI technologies further revolutionizes the space by enabling permissionless, transparent, and global markets without intermediaries, with smart contracts automating payouts and ensuring integrity, exemplified by partnerships with MLB, UFC, and CNBC.

The regulatory landscape remains a pivotal factor shaping the trajectory of prediction markets, with the CFTC playing a central role by establishing clear rules, granting licenses such as the National Futures Association approval for margin trading, and actively supporting innovation while balancing incumbent industry concerns. Kalshi’s legal battles, including suing the CFTC to list election markets and navigating 24-hour contract reviews, illustrate the complex regulatory market fit these platforms must achieve. Meanwhile, major land-based gaming operators like Caesars and MGM strategically abstain from the space due to licensing constraints and legal uncertainties, contrasting with aggressive investments from DraftKings and FanDuel despite escalating state-level criminal charges. The ongoing federal rulemaking process and lawsuits highlight the tension between state gambling laws and federal jurisdiction, underscoring the evolving legitimacy and institutionalization of prediction markets.

Prediction markets grapple with profound ethical and legal challenges stemming from their unique structure and contract offerings. Unlike traditional sportsbooks, platforms like Polymarket and Kalshi operate 24/7 with fewer regulatory guardrails, exacerbating societal harms such as gambling addiction; for instance, Kalshi’s monthly volume is 81% sports-related, intensifying concerns about normalizing gambling behaviors through aggressive marketing partnerships with CNN and CNBC. Moreover, ethically fraught contracts—such as wagers on disasters like California wildfires—raise moral questions about the commodification of tragedy, while the financialization of everyday risks blurs lines between gambling and insurance, as Kalshi’s co-founder Tarek Mansour envisions “financializing everything.”

Insider trading and market manipulation present core dilemmas that challenge both the integrity and regulatory frameworks of prediction markets. Platforms like Polymarket have historically tolerated insider trading, with founders like Shayne Coplan calling it “cool” that insiders have financial incentives to reveal information, while Coinbase CEO Brian Armstrong acknowledges its role in improving market signals. However, anonymity and lack of KYC on decentralized platforms make detection and prosecution nearly impossible, exemplified by a trader who earned $1.3 million exploiting insider knowledge yet remains unidentified. This acceptance of insider trading as a feature rather than a bug starkly contrasts with traditional securities law, where such behavior would be a clear violation, underscoring the regulatory and ethical gray zones these markets inhabit.

Regulatory responses to ethical and manipulation concerns in prediction markets have evolved toward nuanced oversight rather than outright bans, reflecting the sector’s complex legal landscape. The Commodity Futures Trading Commission (CFTC) has classified prediction markets as derivatives—swaps or futures contracts—subject to exchange trading and clearinghouse processes, emphasizing policing insider trading and fraud over paternalistic prohibitions. Kalshi’s rigorous regulatory approach, including individual contract approvals with 24-hour intervention windows, contrasts with offshore platforms’ looser standards and highlights the ongoing federal-state jurisdictional battles, with multiple states suing platforms like Kalshi and Polymarket over gambling classifications and tax revenue concerns. This regulatory tug-of-war is expected to culminate in Supreme Court decisions by 2027–2028, which will critically shape the balance between market integrity and growth.

The inherent vulnerability of prediction markets to manipulation extends beyond insider trading to strategic gaming of niche contracts, threatening their foundational premise of unbiased forecasting. Cases such as a presidential speechwriter betting on a specific word’s appearance and then ensuring it occurs illustrate how participants can influence outcomes without breaking laws, while the ease of collusion among small groups in obscure markets complicates detection and enforcement. As SEON CEO Jack Hirsch warns, regulators remain focused on outdated gambling frameworks, missing the unique peer-to-peer dynamics and manipulation risks intrinsic to these markets. This manipulation risk, coupled with ethical debates over contract types—especially those involving death, war, or terrorism—necessitates balanced regulatory frameworks that safeguard market integrity without stifling innovation.

By early 2026, the United States had carved out a clear regulatory path for prediction markets through the Commodity Futures Trading Commission’s licensing of derivatives exchanges and clearinghouses, exemplified by Polymarket’s acquisition of QCX, LLC and QC Clearing LLC in July 2025. This regulatory clarity catalyzed institutional and retail participation, further bolstered by innovative partnerships such as Polymarket’s multi-year deal with TKO Group Holdings and Kalshi’s collaborations with CNN and CNBC, which integrated real-time event probabilities into mainstream media, while ICE’s $2 billion investment underscored the growing legitimacy and financialization of the sector.

In stark contrast, Europe’s regulatory environment remains fragmented and restrictive, with the European Securities and Markets Authority (ESMA) reaffirming in July 2026 that prediction market event contracts are effectively binary options subject to the EU-wide retail ban under MiFID II. This hardline stance, coupled with coordinated warnings from nine European gambling regulators and enforcement actions like Spain’s temporary blocking of Kalshi and Polymarket in 2023, has raised significant barriers for licensed market entry, leaving no licensed prediction markets operating in Europe and forcing firms to navigate complex classification challenges before any launch.

Globally, regulatory approaches diverge sharply along the axis of whether prediction markets are viewed as financial innovation or social control mechanisms. While the U.S. judiciary’s ruling that election prediction contracts are not gambling opened doors for traditional financial institutions like ICE, Robinhood, and CME, major Asian jurisdictions predominantly treat prediction markets as gambling, focusing on public order rather than financial regulation, resulting in limited formal engagement and a regulatory landscape that remains largely uncharted outside of countries like India and Indonesia.

Amid these global tensions, Malta is pioneering a novel regulatory approach by drafting a bespoke legal framework that would establish prediction markets as a third category distinct from both finance and gambling, with oversight by the Malta Gaming Authority. This initiative echoes Malta’s earlier innovation with the Virtual Financial Assets Act (VFA) for crypto assets, which created a sui generis licensing regime before being superseded by EU-wide MiCA regulation. Economy Minister Silvio Schembri and Prime Minister Robert Abela’s commitment positions Malta as the first EU member state actively seeking to license prediction markets under a dedicated regime, potentially setting a precedent for regulatory innovation in Europe.

By mid-2026, the future of prediction markets hinges significantly on the Commodity Futures Trading Commission's willingness to establish a clear and consistent regulatory framework, as exemplified by ProphetX's July 2026 petition urging the CFTC to formalize Section 4(c) rules. This move aims to provide technology vendors in sports prediction markets with regulatory certainty, moving away from the patchwork of individualized no-action relief and reinforcing federal preemption over conflicting state gaming laws. Such clarity is not only crucial for legal resolution but also paves the way for prediction markets to gain mainstream financial legitimacy and broader adoption.