Regulatory Challenges Ahead for Prediction Markets as Legal Disputes Grow

POLYMARKET KALSHI OPINION PREDICTION MARKETS

In recent years, prediction markets have gained significant attention, particularly due to their rapid growth. A report by Owen Lau from Clear Street highlights that this surge has thrust these markets into largely unexplored regulatory realms.

The remarkable expansion of prediction markets in 2024 and 2025 has shifted investor interest from mere demand to a crucial question: how will regulations ultimately determine which platforms can thrive?

Once considered niche offerings, event contracts associated with elections and sports have transitioned into the mainstream in 2024, generating substantial liquidity, attracting institutional investors, and becoming more relevant to everyday consumers.

As trading volumes surged in 2025, prediction markets began to reflect characteristics of early-stage cryptocurrency—innovative, rapidly expanding, yet navigating a complex regulatory grey area.

Key Issues: Federal vs. State Authority

At the center of the regulatory discussion is a challenge regarding jurisdiction between federal and state authorities. The primary concern is whether the Commodity Futures Trading Commission (CFTC) has federal authority over contracts related to sports events or if states can regulate them as gambling activities.

Clear Street points out that this situation parallels the longstanding debate in the cryptocurrency sector about whether digital assets fall under the jurisdiction of the Securities and Exchange Commission (SEC) or the CFTC. During the Biden administration, this ambiguity has slowed institutional acceptance of cryptocurrencies, a challenge that prediction markets may now be confronting.

States have already undertaken rigorous legal actions against various platforms, while the CFTC has largely deferred to judicial decisions in clarifying what should be deemed “gaming.”

The implications are significant, encompassing around $400 billion in annual trading volume and an estimated $4 billion in potential tax revenue for the states. Clear Street believes that most current trading activity centers on sports-related contracts, though this may change as new applications develop.

Conflicting Court Decisions Bring Further Uncertainty

To date, three important legal cases—KalshiEX LLC v. Hendrick, KalshiEX LLC v. Flaherty, and KalshiEX LLC v. Martin—have resulted in inconsistent rulings.

Judges in Nevada and Maryland have sided with state authorities, while a judge in New Jersey ruled in favor of Kalshi. Appeals are currently underway, and many believe this issue may eventually be brought before the U.S. Supreme Court.

Clear Street warns that depending solely on court decisions is unlikely to yield long-term clarity. Past experiences with judicial outcomes in the crypto space have shown that rulings are often narrow and specific rather than providing a comprehensive regulatory framework.

Advocacy for Legislative Action

The report suggests that sustainable growth in prediction markets will likely necessitate active lobbying and new legislation to establish clear rules. Beyond addressing jurisdictional questions, other crucial issues such as disclosure standards and risks of market manipulation—especially in niche or low-trading markets—must be handled effectively.

In the interim, the industry is left operating under what Clear Street defines as a “sword of Damocles,” with regulatory risks looming over their prospects for future growth.

Despite the uncertainty surrounding the regulatory landscape, the firm sees prediction markets as a promising avenue for publicly listed cryptocurrency-related companies like Coinbase and Circle, assuming a clearer regulatory environment eventually evolves.

This article provides a comprehensive overview of the current legal and regulatory challenges facing prediction markets and highlights the importance of establishing a clearer framework to facilitate their continued growth and development in the future.