
For over 175 years, exchanges like the Chicago Board of Trade (established in 1848) have provided options and futures markets for securities and commodities.
This thriving derivatives industry, distinct from the gambling business, is overseen by the Commodities Futures and Exchange Commission (CFTC), which has the federal mandate to regulate futures and derivative markets. Historically, derivatives have played a crucial role in stabilizing commodity prices and mitigating financial risks for industries, establishing themselves as indispensable economic tools.
The CFTC’s position has been that futures contracts must serve genuine economic hedging and price discovery utility. However, the intersection of event contracts and prediction markets remains a gray area in current laws and regulations, leading to significant legal and operational challenges. The CFTC’s oversight does not yet fully address the burgeoning business of predicting the outcome of future events, leaving companies like Kalshi and PredictIt navigating uncharted waters. These firms are currently taking bets on political events while awaiting clarifications from the courts.
The CFTC maintains that betting on political outcomes constitutes gambling and poses societal harm, while the industry counters that these markets provide legitimate hedging opportunities, economic benefits, and valuable information for the public. The popularity of wagering on elections and other events continues to grow.
This growing market has attracted market makers in the prediction business looking to compete with state-regulated online sports betting platforms such as DraftKings, which is reportedly considering launching a prediction-market business of its own. Similarly, companies like Kalshi and Crypto.com (which acquired Nadex, a CFTC-approved exchange, in 2016) are exploring entry into sports betting markets. Robinhood, a securities broker-dealer which is expanding its business to managing retirement accounts, has also expressed interest in the sports betting industry.
Historically, sports betting in the U.S. has been the domain of Nevada casinos, which began offering it as a marketing tool and amenity to attract visitors. In 1961, the Wire Act made it illegal to place bets on sporting events but provided exemptions for some states like Nevada. The evolution of legal sports betting culminated in the Supreme Court’s 2018 decision to overturn PASPA, paving the way for broader state-level regulation of sports wagering.
In 2021, the CFTC approved Kalshi to operate as a peer-to-peer betting exchange but specifically excluded betting on politics and sports. The exclusion of sports betting was based on the understanding that it falls under state jurisdiction, while the prohibition on political event betting stemmed from concerns about influencing election outcomes. Additionally, controversies surrounding political betting—such as potential manipulation of markets to sway election results—have further cemented the CFTC’s stance.
The distinction between prediction markets and traditional sports betting carries significant economic and social implications. Prediction market makers and their proponents argue that they provide valuable insights into public sentiment and serve as tools for decision-making in various sectors.
Sports betting, on the other hand, has long been associated with entertainment and the gambling industry, with a more recreational focus. Emerging technologies, such as blockchain and AI, are also shaping both fields, creating opportunities for innovation while underscoring the need for clear regulatory boundaries.
Given the historical and regulatory context, companies like Robinhood, which operate in the financial industry and manage financially sensitive customer deposits, would be well-advised to avoid entering the sports wagering space, historically associated with the gambling industry. Similarly, financial exchanges like Kalshi and Crypto.com should focus on their core mission of offering event contracts unrelated to sports. Conversely, sports betting giants such as DraftKings and FanDuel should refrain from entering the prediction markets for political events, which are distinct from the established domain of sports betting.
The historical precedent of the 1961 Wire Act, the 2018 PASPA reversal, and the CFTC’s rulings highlight the importance of maintaining these boundaries to preserve the integrity of the prediction industries. Regulators and industry leaders must collaborate to craft policies that reflect the unique roles and societal impacts of these markets. By respecting these boundaries and fostering innovation within their respective domains, businesses can ensure a more stable and legally sound future for event contracts and prediction markets.