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 an extremely difficult situation.

Major trading platforms have repeatedly been hit by negative public opinion. The core problem is that it is difficult to prevent insider trading, and insider trading is steadily eroding market credibility. The U.S. Senate has just issued a ban that completely prohibits senators from placing bets and trading on prediction trading platforms. At the same time, the governors of Illinois, New York, and Maryland have also ordered that state public officials in their respective states be prohibited from trading on such platforms. 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 the Polymarket platform and profit more than $400,000.

States are also continuing to go after the sports-betting business that is the most profitable within prediction markets. Wisconsin’s Attorney General filed lawsuits against five related platforms on the grounds of unlicensed gambling. New York’s Attorney General cited the same legal reasoning to sue two platforms, and, together with the attorneys general of 38 other states, supported Massachusetts’ lawsuit against the Kalshi platform.

Although platforms such as Kalshi and Polymarket have fought back, the results have been mixed. Critics argue that these platforms are essentially no different from traditional sports betting; they have merely exploited regulatory gaps between federal oversight and state gambling laws. To unlock the industry’s enormous potential for growth, prediction markets need not only to win the current legal battles, but also to reverse the negative public perception of the fairness of their trading.

Sports Events Become the Absolute Mainstream

The 2024 U.S. presidential election showed the world the development potential of prediction markets. Now sports-event betting has become the primary entry point for ordinary users to get involved in prediction markets.

Kalshi’s trading volume surpassed $230 billion in 2025, with about 86% of transactions related to sports events. Reports say that in just the first quarter of this year alone, Polymarket’s sports-event trading volume reached $10 billion, and the sports segment remains the platform’s hottest category.

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

The growth outlook for sports prediction markets has long been a focus for capital. Kalshi and Polymarket have already raised tens of billions of dollars in venture capital.

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) teamed up with Polymarket. In March, Major League Baseball (MLB) signed an exclusive three-year partnership with the platform, with a total cooperation amount of up to $300 million. It is also understood that the National Basketball Association (NBA) is actively in talks with the two platforms.

Legal Confrontation Has Become Inevitable

Prediction markets are now deeply entangled in a dispute over jurisdiction between federal regulators and state governments. Sports betting is regulated at the state level, while financial swap derivatives are regulated at the federal level. And the core of all the controversy lies in which category the sports contracts of Kalshi and Polymarket should be assigned to. Platform operators argue that they belong to financial swap products, while multiple state governments believe they are merely sports betting in disguise.

Kalshi’s own inconsistent legal positions have further complicated the situation. As early as 2023, when the U.S. Commodity Futures Trading Commission (CFTC) tried to halt election prediction markets, Kalshi argued that elections are not “gambling games” because elections are not competitive sports events. At that time, the company also voluntarily acknowledged that football events fall within the category of gambling. Now, it has overturned its earlier position, and states have continued to cite the company’s past statements in court, directly pointing to the inconsistency of its stance.

The key legal dispute centers on a core definition in the Dodd-Frank Act: financial swap products must be anchored to real financial, economic, or commercial outcomes. Kalshi claims that events such as the Super Bowl meet that standard because they drive an economic ecosystem worth hundreds of billions of dollars in advertising, cultural tourism, and merchandise. But state governments counter that this interpretation overstates and misreads the original intent of the Act. If the Super Bowl can be included, then almost all social events could be forcibly categorized as financial derivatives.

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

So far, courts at all levels have not reached a unified conclusion on this legal definition. In early April this year, the highest-level court responsible for handling prediction market-related cases—the U.S. Court of Appeals for the Third Circuit—issued a ruling supporting Kalshi. Soon after, the U.S. Court of Appeals for the Ninth Circuit at the same level held a hearing, and a contrary ruling is highly likely.

When appellate courts issue split decisions, it usually pushes cases to be appealed to the highest court. But even if the highest court gets involved, it may not definitively settle everything: the essence of the dispute is disagreement over how to interpret congressional statutory language, Congress can revise the law at any time, and the relevant legislative process is already underway.

The recently proposed “Prediction Market Gambling Assessment Act” would tighten the definition of financial swap products, completely excluding sports and event-based contracts. Once it is implemented, all current legal disputes would lose their meaning. Against the backdrop of a government administration that is relatively friendly toward the industry, whether the bill can secure enough votes to pass remains uncertain. Meanwhile, on Polymarket, the prediction about “whether there will be a ban on sports prediction markets in 2026” currently has a pass rate of only 11%.

If Congress delays taking legislative action for a long time, the case will likely ultimately be decided by the highest court. If the platforms win, most states’ lawsuits will lose their basis. If they lose, the platforms will have to operate with great difficulty by adapting to each state’s gambling regulatory rules one by one.

The reality is that even winning a case in the highest court cannot guarantee permanent stability. If the congressional term changes and Congress takes a tougher regulatory stance toward prediction markets, the definition of financial swap products can still be revised again. At that point, the platforms would have only one remaining path: file a constitutional lawsuit, arguing that the relevant laws are unconstitutional and exceed Congress’s legislative regulatory authority—but this option is extremely difficult.

Even if the current administration publicly backs prediction markets, the road ahead for the industry remains full of obstacles.

Winning Over Public Opinion

Amid numerous legal disputes, the prediction market’s core advantages themselves are being ignored by the public.

The original intent of state gambling legislation is to protect consumers and prevent them from being exploited long-term by rules designed by platforms. Prediction market prices are formed through peer-to-peer trading between users, while platforms only facilitate trades. Although platforms can earn substantial profits from large trading volumes, their underlying trading mechanisms mean that ordinary users are not competing against institutional counterparts that deliberately design schemes solely to extract value from users.

But it is hard for this logic to convince the public. Most people already believe that such disguised betting activities should be subject to stricter controls, and they are dissatisfied with prediction markets being tolerated as a form of speculative gambling. In addition, because the public generally does not trust the fairness of Wall Street—even the fairness of the crypto industry—combined with frequent insider trading scandals, more and more lawmakers are seizing the momentum to regulate these platforms, turning it into a political choice that panders to populist sentiment.

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