The rise of prediction markets has enabled Americans across the country to trade on practically any event, from sports to elections and, most recently, death and destruction.
Will Iran’s leader be removed, potentially by assassination? Will a nuclear bomb be detonated?
Prediction markets such as Polymarket and Kalshi enable customers to bet yes-or-no on all kinds of timely questions, pitting individuals against each other rather than against a casino or betting site
The rise of these markets has prompted a backlash, most recently over the controversial contracts related to war that may have violated U.S. regulations. Mainstream financial players are struggling to embrace the latest innovations without inviting a regulatory crackdown. In Congress, Sen. Chris Murphy, a Connecticut Democrat, probably spoke for many of his colleagues when he responded to wagers on military strikes against Iran with an incredulous, “It’s insane this is legal.”
It may not be legal.
As it stands, Kalshi and Polymarket have offered sports-event contracts in Illinois and other places where state regulators say the products amount to illegal or unlicensed sports betting, setting up a direct clash over whether federal derivatives law can pre-empt state gaming rules. Illinois is among the states that have pushed back, and the Trump administration has backed a broader view of federal authority.
With Congress unlikely to act during an election year, the Supreme Court could be left to decide cases now winding through lower-court jurisdictions that appear to be split. The dispute doesn’t fit neatly into a conservative versus liberal legal template. Depending on the outcome, the future of these markets could be up for grabs or, conversely, states could lose control over gambling and the billions of dollars in revenue it generates.
For years, this page has staunchly defended free markets. But we’re not in favor of free-for-alls, and the current state-of-play is alarming. Even many of the free-market advocates attending last week’s Futures Industry Association conference express misgivings. An industry that has worked for decades to disassociate itself from gambling now finds itself tempted to roll the dice on these fast-growing new markets.
Cboe says it is focused on financial contracts rather than sports betting and is launching a more nuanced new version of the simple yes-or-no prediction-market offerings, aiming to attract cerebral young traders who could graduate to its traditional options products.
Crosstown rival CME has partnered with FanDuel, the sports betting platform, and Chief Executive Officer Terry Duffy recently complained about the difficulty of making strategic decisions without legal or regulatory clarity. Last year, ICE, owner of the NYSE and other exchanges, announced it made a multibillion-dollar investment in Polymarket, which offers a dizzying range of contracts.
Problems are piling up, including disputes over how markets are resolved and scrutiny over whether traders with inside information could profit from sensitive events.
Exchanges have a duty to list contracts that can’t be readily manipulated. Sizable bets were placed hours before airstrikes began in Iran, for instance, raising questions about whether government officials profited from secret intelligence.
The Commodity Futures Trading Commission, on deck to regulate Kalshi, Polymarket and their ilk, has been hollowed out by layoffs and retirements. More than a year into the Trump administration, only one of its five commissioners is in place, and Chairman Michael Selig has yet to establish any credibility.
As of today, the CFTC is poorly positioned to protect customers and prevent manipulation in these fast-moving new markets. Congress shows little sign of settling the regulatory question anytime soon. With lawmakers divided and courts weighing competing rulings, the legal framework governing these markets may remain unsettled for some time.
This undesirable situation can be resolved with common-sense guardrails. If Congress is too divided to act, and courts won’t reach a final ruling for years, the trading industry should take matters into its own hands, policing itself to a greater extent than it has so far.
Self-regulation would be much better than letting a dispute fester with states coast-to-coast and failing to protect the integrity of markets that a new generation of customers has eagerly embraced. The longer the wait, the greater the risk of a potentially transformative financial innovation being smothered in the crib.
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