Prediction Markets Are Winning the War Against Them

Minnesota lawmakers enacted a statewide ban on prediction market in May. The first-of-its-kind law had been scheduled to go into effect on August 1. Now, that ban is on hold after the top two prediction markets, as well as the federal agency tasking with regulating them, persuaded a federal judge to temporarily block the law on Monday.Judge Katherine Menendez granted the preliminary injunction after concluding that Minnesota’s ban was likely pre-empted by the CFTC’s exclusive regulatory authority, a position that the agency had forcefully advanced in the lawsuit alongside the two best-known brands in the nascent industry, Kalshi and Polymarket. While Menendez noted that at least some of the contracts offered by the companies fall outside the CFTC’s jurisdiction, she opted for a broad injunction for now and emphasized that the final judgment may be different.Monday’s ruling is not the end of the legal battles surrounding prediction markets. Other jurisdictions have had some success in regulating or restricting Kalshi, Polymarket, and similar companies. But it is a striking testament to the prediction market industry’s success in regulatory capture—and the need for more concrete restrictions from Congress.Kalshi, for its part, took a victory lap after the ruling. “Minnesota was the first state to pass a law banning prediction markets, and a court prevented it from being enforced less than two months later,” a company spokesman told reporters yesterday. “Today’s decision makes it clear: States cannot ban things that they don’t have jurisdiction over.”Their celebratory defiance is par for the course these days. The modern age of gambling began in 2018 after the Supreme Court struck down a federal ban on sports betting on Tenth Amendment grounds. Sportsbooks like DraftKings and FanDuel are largely regulated at the state level, following the longstanding tradition of regulating gambling as a public-health matter. More than two dozen states now allow betting on sports in some capacity.Prediction markets also allow customers to wager money on the outcome of future events. Instead of placing a more traditional wager against a sportsbook’s odds, customers at a prediction market effectively bet against one another. In practical terms, they buy an “event contract” that predicts a binary outcome for an event—say, for example, that the Los Angeles Dodgers will win the 2026 World Series—within a certain period of time.If the Dodgers secure a threepeat this October, the contract’s seller would pay the buyer the amount specified in the contract. If the Chicago White Sox win the Fall Classic instead, the contract’s buyer gets nothing. Contracts can be bought and sold on prediction markets, with prices fluctuating depending on the market’s perception of an event’s likelihood. In that sense, prediction markets can somewhat resemble derivatives markets for publicly traded stocks.Prediction markets justify their existence in a number of ways. One is by claiming to offer some otherwise unobtainable insight into the future. “Our markets reflect accurate, unbiased, and real-time probabilities for the events that matter most to you,” Polymarket class on its website. “Markets seek truth.” Kalshi, for example, claims that its “inflation and federal [interest] rate forecasts have been more accurate than economists, pundits, and traditional news outlets over the past year.” Another increasingly common justification for a prediction market’s existence is that it allows customers to “hedge” their futures on specific outcomes. “For example, if you have student debt and are worried about relief not passing, you can purchase a contract and get a payout even if it doesn’t pass,” Kalshi claims on its website. “If you’re worried about the economic fallout of the government shutting down, you can place a trade to hedge against it.” This resembles the role that derivatives often play in financial markets: allowing large funds to “hedge” their stock purchases.For that reason, prediction markets are currently regulated by the Commodity Futures Trading Commission, a federal agency that oversees the nation’s derivatives markets. The Biden-era CFTC sought use its rulemaking power to broadly forbid prediction markets from taking bets on sports-related events, but the change in administration produced a much friendlier regulatory landscape.Michael Selig, the CFTC’s current chairman, is a Trump appointee who previously worked for crypto companies and prediction markets. He wields immense power over the regulatory process as the commission’s sole member at the moment; Trump has declined to put forward nominees for the other vacancies. The New York Times reported earlier this summer that, under Selig’s watch, the CFTC went from bringing roughly 80 enforcement cases against the crypto and prediction-market industries in the Biden era to just two as of this June.In its latest rulemaking proposal last month, the CFTC laid out plans to allow prediction markets to offer contracts on all but a few sports-related predictions. Among the handful of proscribed contracts would be those involving player injuries and fights and ones involving officiating calls. Some critics, including the National Football League, urged the CFTC this month to substantially narrow the types of contracts that could be offered, arguing that allowing them would be against the public interest.The CFTC rule, if adopted, would entrench vast amounts of potential income for prediction markets. Fortune magazine reported this month that Americans spent roughly $166 billion on sports betting in 2025, which was “more than the entire U.S. movie, music, book, and museum industries generated in revenue combined.” Kalshi and Polymarket have also followed the lead of sportsbooks by trying to integrate themselves into the four major North American sports leagues. MLB and the NHL have already struck bargains with them, while the NBA and the NFL have been more skeptical.One big problem for prediction markets is that they are uniquely vulnerable to insider trading. Part of this stems from their decentralized nature. Because a sportsbook is the counterparty to any customer’s winning bet, it has a strong interest in ensuring the integrity of any game or contest on which it takes wagers. Prediction markets, on the other hand, have no inherent interest in the underlying fairness of an event because they make money through transaction fees.The other part of the vulnerability is that prediction markets take bets on what is essentially non-public but theoretically knowable information. Nobody can know who will win this year’s World Series until it takes place and the outcome is revealed to all observers simultaneously. A prediction market bet on, say, whether OpenAI will go public this year is theoretically knowable, albeit by only a handful of people in the world.This makes prediction markets a uniquely dangerous mechanism for corrupt self-dealing. U.S. military strikes against Iran earlier this year often saw large upticks in bets placed on specific days, possibly reflecting bets placed by people in U.S. military or political circles. Federal prosecutors brought charges against a U.S. soldier in April who allegedly used classified information about the military raid to capture Venezuelan President Nicolas Maduro to place bets on Polymarket, leading to a $400,000 windfall. Earlier this month, NPR reported on how campaign staffers betting on their own races has become a scourge—and the somewhat limp efforts of the industry to curb this activity. The White House even had to place Gabriel Perez, the president’s longtime teleprompter operator, on unpaid leave earlier this month while it investigates more than $100,000 in prediction market bets that he made.The CFTC’s pro-prediction market pivot also has its share of critics. Among those who spoke out against the recent proposed rule were Christopher Dodd, a former Connecticut senator who authored the 2010 financial reform law that expanded the CFTC’s regulatory authority. “At the time Congress passed Dodd-Frank, we were well aware of existing federal laws ‌regulating gaming,” the former lawmaker explained in a formal comment in the rulemaking process. “We had no intention of amending those laws.”A future Democratic administration may be able to remedy the problem when it retakes control of the CFTC in the future. But a more concrete solution may be needed from Congress to constrain or prohibit an inherently problematic business model. Kalshi reportedly spent more than $500,000 on lobbying in just three months earlier this year, while traditional sportsbooks and gambling associations have spent close to $1.5 million across the same period. In other words, Americans’ losing bets are being used to ensure that Americans keep betting—and losing—for years to come.