Key Moments:
- Prediction markets like Kalshi could shift from federal oversight to navigating fifty separate state gambling commissions if reclassified as gambling.
- Markets focused on topics such as inflation, employment, or Federal Reserve decisions would likely disappear under gambling regulations.
- Reclassification would fundamentally alter user access, tax treatment, and the structure of available markets.
Potential Regulatory Overhaul
Prediction markets have long operated in a unique space, functioning as financial platforms where users can trade on questions resembling wagers. Operators such as Kalshi present themselves as venues for trading contracts tied to measurable outcomes, including economic indicators and event results. However, ongoing scrutiny from state regulators has raised the question of what would happen if these platforms were subject to the same rules as gambling operations.
If a platform such as Kalshi were required to operate under gambling legislation, it would move away from its model as a financial exchange and adopt an approach similar to a novelty sportsbook. This would necessitate a foundational redesign, significantly impacting how the platform works and the experience for end users.
| Key Operational Changes | Description |
|---|---|
| Regulator | Transition from federal governance by the CFTC to oversight by fifty state gambling commissions, with strict rules and geofencing by state. |
| Users | Shift toward exclusively serving recreational bettors, excluding professional traders. |
| Age & Onboarding | Implementation of gambling-specific verification, self-exclusion features, and 21+ age restrictions. |
| Tax | Profits taxed as gambling winnings, with losses only deductible against winnings. |
| Catalogue | All markets subject to prior approval and focused on entertainment, with fewer listings available weeks in advance. |
From Market Insights to Entertainment
One central distinction between financial markets and gambling is their underlying intent. Prediction markets are intended to transform collective knowledge into actionable prices, providing insight into probable outcomes. Gambling products, by contrast, focus on entertainment and generating revenue.
Operating under gambling regulations would require all markets to meet specific criteria: objectivity, source-based resolution, independence from insider influence, and social acceptability. As a result, most current offerings – including those predicting inflation rates or major economic decisions – would be deemed unsuitable. Instead, the platform’s catalogue would likely be restricted to safe thematic topics, such as sports or entertainment-related markets.
Transparency and Market Integrity
Recent developments have highlighted the contrast between prediction and traditional betting markets. For example, sharp movements in Nobel Peace Prize odds on Polymarket drew public scrutiny and prompted an investigation by the Nobel Committee. However, this type of transparency is central to the integrity of prediction markets.
Sportsbooks, in comparison, often mitigate risk by excluding markets susceptible to leaks, such as prop bets on elements like Gatorade color or anthem duration. While both models face risks, prediction markets typically expose potential issues to the marketplace, while sportsbooks take steps to avoid such exposure.
The Consequences of Reclassification
Reclassifying a platform like Kalshi as a gambling operation would not only impact liquidity – it would fundamentally change its core identity. As a financial tool meant to offer data-driven forecasts, losing this purpose would transform it into a compliance-heavy trivia platform with a narrow focus.
At present, Kalshi remains under the regulation of the CFTC. However, if state-level measures to reclassify it as gambling succeed, the sector could fragment into multiple cautious, regulator-approved markets. While some aspects of speculative betting may remain, the broader mission of leveraging market insight for forecasting would likely be lost.
- Author
Daniel Williams
