The Prediction Markets’ Biggest Bet: Regulatory Acceptance
The business of predicting the future has developed into a multibillion-dollar industry, and one that continues to grow at an exponential rate. Prediction markets now allow users to effectively trade shares on the outcome of future events without the stigma associated with conventional wagering. In these markets, rather than betting against a casino or sportsbook as is seen in the gaming industry, you trade peer-to-peer against other users, with each traded contract having a defined outcome, and a price that fluctuates as participants buy and sell based on what they believe will happen. Regardless of whether the question concerns a presidential election, a sporting event, or even the next interest rate decision (a topic of growing interest amongst the masses on a monthly basis), a growing number of consumers and institutional investors are willing to hedge their bets on these trends for personal financial gain. Two companies in particular, Kalshi and Polymarket, have emerged as the leading beneficiaries of this increasing demand, attracting substantial amounts of investor capital and subsequently expanding trading activity to position themselves in relatively uncharted waters: the intersection of legitimate financial markets and online wagering. As such, they have quickly moved from a niche forecasting concept into their own high-profile financial technology sector.
This newfound success however has outpaced the development of a consistent legal framework necessary to harbor firms operating in the prediction market, and as such have hindered their ability to operate across the United States and various international markets due to an abundance of legal restrictions, regulatory disputes, and questions about the appropriate classification of their offerings. While market demand and outside investment are keys for international businesses, questions remain as to who has the authority to regulate these products, and under what rules. In the United States, prediction-market operators are currently navigating a difficult divide between federal commodities oversight and individual state gambling laws. That uncertainty affects where firms can operate, how they must protect the information provided by their customers, and ultimately whether or not their business models can scale consistently moving forward.
A Different Path, But A Common Problem
Founded in 2018, Kalshi built its U.S. strategy around federal oversight and became a Designated Contract Market (DCM) overseen by the U.S. Commodity Futures Trading Commission (CFTC) in 2020. This status became central to its argument that qualifying event contracts are derivatives governed by federal commodities law, rather than wagers subject to state-by-state gambling restrictions. Polymarket on the other hand grew through a crypto-enabled platform founded in 2020 that operated at the international level before later pursuing a U.S. presence which brought it under greater regulation. The platform’s global reach has conflicted with its regulatory status in the U.S. however, as authorization in one market does not automatically authorize it to offer the same product everywhere.
The most consequential aspect of the debate for both firms when it comes to their availability to operate between states involves the aforementioned event contracts, especially those tied to sports and whether they are federally regulated derivatives or gambling products subject to state licensing and additional tax and consumer-protection requirements. Both entities have responded to push-back from state gaming regulators and additional legislative challenges by asserting federal preemption under the CFTC, arguing that CFTC oversight and federal law supersedes the ability of individual states to prohibit their respective contracts which they define as legal financial instruments under federal authority. State regulators have countered that exchange registration is not a blanket exemption from gambling laws, particularly when their products resemble sports wagers. Thus far, the disagreement has produced multiple state lawsuits (that these companies have attempted to move to federal court), enforcement actions and inconsistent outcomes across various jurisdictions, though non-sports-related event contracts are currently accessible in over 40 states within the United States in spite of these challenges. Analysts and executives of major firms operating in the prediction market space believe however that the greater dispute over statewide viability could ultimately reach the Supreme Court, as conflicting rulings have increased uncertainty over the scope of federal government’s ability to override conflicting state laws.1
Should this scenario ultimately unfold, a favorable ruling could support broader national distribution. An unfavorable one on the other hand could require additional licenses, taxes, product changes and create further geographic exclusion. This legal uncertainty has also complicated company marketing, payment partnerships with third-party providers and financial institutions, and impacted long-term product rollouts. In spite of these uncertainties however, the bottom-lines of several major operations in this evolving space have boomed since their respective arrivals on the scene. Kalshi recently announced a whopping $40 billion valuation as it prepares for an initial public offering in 2027, while Polymarket is valued at $21 billion following a $1 billion funding round led by 1789 Capital in September 2026.3,4
Compliance and Risk Questions Remain
Raising further questions for the ultimate success of prediction markets is the need to address growing safety risks that come with increased participation and liquidity. Some of the more significant talking points in this regard have included market manipulation, assessing appropriate customer eligibility and maintaining responsible participation, as well as ensuring the integrity of the event outcomes themselves. The CFTC has identified specific risks involving individuals who act as participants (or subjects) within these ecosystems.2 Much like the stock market, the risks of “insider trading” are inherent, as those participating in the market may possess private information that they can use to increase their odds, while public figures and individuals with celebrity status may be able to influence the very events on which contracts settle. This tasks firms operating within this space as needing various safeguards such as effective identity verification, age and location controls, market surveillance, and the proper procedures for investigating suspicious activity and management of new risks.
All told, Kalshi and Polymarket have demonstrated that prediction markets have the potential to attract significant capital and public attention. However, firms operating in this space currently face a foundational problem: While their products are designed to scale nationally, the rules that currently govern their access vary by jurisdiction. State gaming regulators are concerned about licensing, consumer safeguards, and underage participation and tax obligations, while federal authorities focus on the gross integrity of the derivatives markets. As such, it is now up to both state and federal watchdogs to formally define the boundaries between federal and state authority, and in doing so, establish standards for surveillance, disclosures, and consumer protection. Meanwhile, operators must maintain appropriate legal assessments for each product offered and jurisdiction in which they attempt to operate and establish formal compliance protocols before expanding their respective footprints further. For an industry built on pricing uncertainty, the greatest uncertainty now appears to be its regulatory future.
Citations
1. Reuters. Kalshi could be headed for Supreme Court showdown, CEO says. Oct. 21, 2026.
2. Commodity Futures Trading Commission. CFTC Enforcement Division Issues Prediction Markets Advisory. Feb. 25, 2026.
3. Mascarenhas N, Tsekova D. Kalshi finalizing new funding at $40 billion value ahead of IPO. Bloomberg. September 30,
4. Proactive. Polymarket valuation hits $21bn as Trump Jr’s firm leads $1bn round. Yahoo Finance. September 2, 2026.