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- Legislation is first federal attempt to curb prediction markets
- Several states have already taken legal action
- Prediction markets believe they should be regulated as securities
Two bipartisan senators in the US have proposed legislation that would ban prediction markets from offering contracts related to sport.
Prediction markets see customers exchange contracts tied to the result of a particular event, with their value appreciating or depreciating accordingly.
These markets operate under federal commodities and derivatives regulation, which is overseen by the Commodity Futures Trading Commission (CFTC), rather than traditional state gambling laws. This means the service can be offered in US states where betting is not legal.
Major players include Kalshi and Polymarket, while established betting firms DraftKings and FanDuel have launched their own exchanges in a bid to capitalise on demand.
Prediction markets have exploded in popularity over the past 12 months, attracting the attention of politicians who believe it to be a form of unregulated betting that should be subject to oversight by individual states.
The legislation proposed by Republican senator John Curtis and his Democrat counterpart Adam Schiff is the first bipartisan attempt to regulate the sector at a senate level. Outlining the reasons for their intervention, both accused the CTFC of not doing enough to protect consumers who were being exposed to the dangers of gambling.
The bill would also ban exchanges from offering casino-style games on their platform.
Several states have already filed civil lawsuits against prediction markets in a bid to force them to file for betting licences that would impose more stringent restrictions and reduce the risk of market manipulation. Arizona went one step further last week by filing criminal charges against Kalshi, accusing it of running an illegal sports and election betting operation.
Prediction markets themselves have taken legal action against states to pre-empt such action. They continue to argue that they are compliant with every obligation demanded by the CFTC and believe individual states are seeking to exert powers they do not possess. In a statement to the Wall Street Journal, Kalshi suggested the senate proposals were the result of lobbying by the casino industry, keen to protect their interests.
Beyond the social concerns of prediction markets, several sports organisations are increasingly concerned about the risk of manipulation of sporting events and potential insider trading.
However, this has not stopped several from signing partnerships with major exchanges. The most recent of these as Major League Baseball (MLB), whose deal with Polymarket includes provisions for the creation of an integrity unit designed to detect malicious activity.
SportsPro says…
Prediction markets are the latest evolution of a US betting market that has experienced unstoppable growth since states where given the power to legalise it in 2018. The result has been the creation of a multi-billion dollar industry, new revenue streams for sports organisations through bookmaker partnerships and data deals, as well as an increase in media revenues for some properties.
But there are also growing concerns about the social impact of betting, while the pace of growth has slowed slightly. The market has now consolidated around a few major players
Prediction markets offer both a new, exciting way to play and are not subject to the same regulatory oversight. A framework exists for new players to enter the market and there are new revenue opportunities for leagues, teams and federations to capitalise on.
However there are signs the prediction market surge will be tempered by greater regulation – to protect consumers and the threat of sport being undermined.
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