PREDICTION MARKETS FACE TOUGH ODDS

Photo by Nick Chong on Unsplash

Ahead of the February 2026 NBA Trade Deadline, predictions on whether Giannis Antetokounmpo would request a trade from the Milwaukee Bucks created a $23M market on Kalshi, a trading platform where users can bet on predictions of real life events. Shortly after the deadline expired, and Giannis chose to stay in Milwaukee, Giannis himself appeared in an advertisement sponsored by Kalshi, joining as an investor.

Not only is this type of suspect celebrity sponsorship in a brand new financial market reminiscent of the FTX-era of sponsorships, people like Giannis now have an unprecedented ability to directly influence prediction markets. Giannis, his agent, and a few key confidants would hold a monopoly on information the public would never receive regarding his trade decision. This creates an insider-trading scenario where the general public is gambling on current events without any clear publicly available information to create informed decisions. Prediction markets, by definition, erase any consumer confidence in outcomes, pointing to the issue facing Courts on whether these prediction market platforms are really legal gambling platforms.

Any conflict of interest between Giannis and Kalshi was settled by the NBA, and basketball remains a staple in sports gambling markets. Still, the fact that millions of Americans continue to place bets on sports does not erase the need for continued public discourse on whether sports betting, and now, prediction markets as a whole qualify under the definition of gambling.

THREE BRANCHES, THREE FOCUSES

To showcase how quickly and significantly traders can profit from prediction markets, a U.S. Army Officer is facing prosecution after he profited $400,000 following the capture of Nicholas Maduro. Congressmen like Senator Blumenthal have requested statements from Polymarket (another predictions market company) on why they continue to allow bets made on war and violence. Congressman Abe Hamadeh calls this a threat to national security, democratic stability, and market integrity, especially after these prediction markets continue to generate massive earnings on everyday developments like the U.S.-Iran Ceasefire. Congress seems unlikely to secure any legislation, despite some bipartisan efforts to reclassify prediction market betting as gambling. 

Although some Republican states are making it clear that prediction markets will be treated as gambling, the Trump Administration is signalling clear policy support for the industry, coupled with the Trump family’s personal financial stake in prediction markets. In addition to comments made by the administration that reveal evidence of insider trading by key officials, the Trump Administration is positioning the Executive as champions of new financial markets, and is looking to deregulate this new industry as much as possible. Michael Selig, the newly appointed head of the CFTC (Commodity Futures Trading Commission), takes the position that the federal government’s established statutes supersede any states’ interest in local regulation. Supporters of this view believe that Americans should have the right to put their own money on the line to support accurate forecasting in futures markets, but this view doesn’t address Congress’s concerns regarding the ability to profit off violence and insider trading.

FIELD & CONFLICT PREEMPTION

Field preemption (whether federal vs state authority can regulate) and conflict preemption (whether state laws pertaining to prediction markets interfere with Congress’s intent) are the main issues at hand when the Courts have discussed cases coming through the appellate courts.

In essence, the Courts are determining whether companies such as Kalshi, Polymarket, and Robinhood are behaving more like DraftKings, or the New York Stock Exchange. However, the conflicting outcomes coming from both District and Appellate level decisions are muddying the waters, a dynamic that typically signals Supreme Court intervention.

Several courts have pushed back on the CFTC's conflict preemption argument, finding that state regulators are exercising proper authority over an industry that behaves like gambling venues, while other circuits find these platforms are more similar to clearinghouses that disperse contracts on 'swaps', thus complying with the federal Commodities Exchange Act (CEA). 

Some cases have been remanded, like the Third Circuit case of KalshiEX LLC v. Flaherty. In this case, amicus briefs acknowledged the role of the state in protecting those under-21 in accessing a betting platform, and the dissent by Judge Roth cites the traditional role that states have long held regarding gambling laws. The Majority remarks that both the regulators and Kalshi made convincing points on whether these predictions themselves qualify as “swaps”. However, the Majority sided with the government stating that the federal government can regulate “contracts markets” specifically because the amended CEA in 1974 addresses Congress’s intent to eliminate the patchwork of state gambling laws in favor of one federal regulation.

Other cases await Circuit Court oral arguments in upcoming weeks. The Ninth Circuit, consolidating cases from Kalshi, Polymarket, and Robinhood, looks likely to rule against prediction markets based on oral arguments heard in April. Nicole Saharsky, an attorney for Nevada’s gaming regulators, argued that the Supreme Court would clearly rule to hand authority back to the states. Kalshi countered that authority in any body other than the CFTC would complicate the federal interest of offering one financial product nationwide. In contrast to the Third Circuit decisions, the Fourth Circuit looks likely to join the Ninth Circuit on May 7, 2026 and rule against prediction markets (as of this writing). 

INTERNATIONAL CONSENSUS

The confusion facing U.S courts is not without international precedent. Across Europe, countries including Belgium, France, Germany, and the Netherlands have moved to ban major prediction market operators under existing national gambling legislation. The U.K. Gambling Commission has similarly determined that markets on politics, sports, and entertainment fall within its gambling regulatory framework. Romania blacklisted Polymarket following its hosting of wagers on the country’s 2025 presidential election, with its gambling authority concluding that betting on a future result, regardless of currency, constitutes gambling requiring a license. These international decisions share a common thread: the structural features of prediction markets, not their branding, determine their legal classification. The fact that the U.S. has yet to reach a similar consensus speaks to the broader difficulty of reconciling a rapidly expanding industry with a regulatory framework that was never designed to contain it. 

MORALS ASIDE, DO PREDICTION MARKETS ACTUALLY PREDICT BETTER? 

The thesis that the markets actually predict presidential elections better than do traditional polls has been tested in the 1988 General Election, finding that the prediction markets functioned better at predicting the presidential election outcomes than Gallup, Harris, The New York Times, and other major polling services. Although this cycle used pre-Internet (and pre-AI) information gathering, it still proved that basic contracts markets could be more efficient and accurate. Polymarket was able to replicate the same accuracy in predicting the 2024 Election, albeit without rigorous testing.

The traditional “wisdom of the crowds” could be one explanation for why prediction markets are producing these superior results in the political arena. After all, Nate Silver was the first to employ this technique prior to 538’s establishment as another proven polling service. Another explanation could be that people are more careful in their decision-making when putting their own money on the line. However, no threat of suspicious insider information was found in either 1988 or 2024 Election cycles.

This application also negates the purpose of futures markets. The original Congressional intent of authorizing futures trading was to place hedges against volatile prices in inelastic markets, such as soybeans futures or other physical commodities. Once financial products became equated with physical goods under the CFTC, it became less clear what hedges against Bitcoin would do to protect the American consumerate. The proffered solution given by Michael Selig would suggest that a hedge against a future prescription drug release could help fund medical bills, which doesn’t address the cost of medical care nor underlying reasons why people are getting sick in the first place. The key takeaway is that unless the issue of insider trading and correct classification of financial products as commodities is cleared, these markets in effect operate as gambling platforms.

CONCLUSION

The stakes in deregulating prediction markets could unleash an unprecedented wave of prediction and sports bets, and would rewrite the definition of gambling. Should Congress continue to block legislation regulating prediction market platforms, they would be complicit in ignoring long-held moral implications of gambling, and they would allow controversial betting on geopolitically critical events like developments in the Middle East. A lack of legislation would erase decades-long state regulations that have allowed for a safer venue for gambling to occur.

*The views expressed in this article do not represent the views of Santa Clara University.