The bets that made crypto prediction markets popular could now be banned

Prediction markets, once a niche activity, have surged in popularity by integrating sports betting, a move that has propelled them into a significant identity crisis and attracted intense regulatory attention. This rapid growth has led to a formal rulemaking process by the CFTC, criminal charges against platforms like Kalshi in Arizona, and legislative efforts in Congress to ban sports bets on CFTC-regulated markets. The core of the dispute lies in whether these prediction markets should be classified as gambling, regulated by states, or as financial derivatives, overseen by federal bodies.

The Bet vs. Swap Dilemma

The central question driving regulatory actions is whether prediction market contracts are essentially bets or swaps. States argue that these contracts function as wagers, especially when lacking commercial hedging use and involving users staking money on outcomes. Conversely, operators contend that event contracts fall under commodities law, and a national market cannot function if states arbitrarily classify them as illegal gambling. This abstract legal classification battle is complicated by the fact that the same product can be framed as a derivative by federal regulators and as gambling by states, leading to a conflict over regulatory authority.

Product Design and Market Integrity

The design of prediction market products significantly impacts their regulatory standing. Loosening criteria for event contracts and prioritizing fast-moving, popular events over precise definitions and irrefutable settlement can cause these markets to drift towards entertainment wagering. When spectacle and volume overshadow precision, and contract terms become open to interpretation, disputes and litigation can arise. Platforms that resemble neutral exchanges with transparent pricing and independent settlement have a stronger claim to federal market status than those appearing as bookmakers. The credibility of the industry hinges on architectural integrity and clear, defensible contract outcomes.

State vs. Federal Authority and Congressional Intervention

While states initiated the fight, framing it as a consumer-protection issue, their primary motivation is also financial and competitive. Event contracts on sports, accounting for up to 90% of transactions on platforms like Kalshi and Polymarket, directly compete with licensed sportsbooks, which generate substantial tax revenue for states. Prediction markets bypass state-based safeguards like age verification and responsible-gambling contributions. The American Gaming Association has highlighted that sports betting platforms have lost over $600 million to prediction markets since early 2025. Escalating actions, such as criminal charges in Arizona and court orders in Nevada, aim to force the industry back under state control. However, some courts have sided with prediction markets, classifying contracts as 'swaps' under the Commodity Exchange Act. The most significant development is the bipartisan congressional bill proposing to ban sports and casino-style contracts from CFTC-regulated prediction markets altogether, shifting the debate from jurisdiction to outright prohibition of certain contract types.

The Future Landscape

The future of prediction markets likely involves a hybrid regulatory regime. This will include tighter federal rules, more category restrictions, increased surveillance demands, and greater pressure for contract clarity and responsible marketing. Platforms will need to demonstrate their legitimacy through product design, settlement processes, and surveillance, rather than just branding themselves as exchanges. Prediction markets have found their mass audience by aligning with sports betting, but now face the challenge of retaining that audience while proving they are meaningfully distinct from gambling, a foundational fight that could extend for years.