Debates continue on whether prediction markets constitute gambling platforms.
By Maria Soledad Dávila Calero
Although they are not new, platforms like Polymarket and Kalshi have jumped in prominence during the last election cycle. At the time, it was because those platforms ran bets over who would win the elections in the United States. Such betting had been previously banned for decades.
Similarly, news outlets began to use the bets in these platforms to gauge public opinion in the same way as the media traditionally uses opinion polls.
The increase in prominence of prediction markets, along with the decision of the Commodity Futures Trading Commission (CFTC) to distinguish them from gambling platforms, has kept the issue in the spotlight.
Let’s explain what this is all about.
What are the prediction markets?
Prediction markets are platforms in which people can make bets about the results of future events. This can include results of elections, if an entertainer, artist or musician will make an appearance in a program, or if the price of a certain product will increase or decrease.
The term for this kind of gambling is an “events-based futures contract” or simply a futures contract.
What are perpetual contracts?
Within the futures contract options, there are perpetual contracts. These serve to bet on the value of a currency, including crypto currency; will it increase or decrease to a specific value? Contrary to regular futures contracts, these do not have a date of expiration.
A tangled web of lawsuits
Jurisdiction: Most of the lawsuits on prediction markets center on whether, for legal purposes, these markets are gambling platforms — and are therefore subject to state jurisdiction — or whether they are investment platforms — and therefore subject to federal jurisdiction. The CFTC has filed nine lawsuits against nine states, Kentucky being the most recent, for approving state laws that regulate prediction markets.
Instruments: The Chicago-based stock exchange operator, CME Group, sued the CFTC for allowing Kalshi and Coinbase, a cryptocurrency exchange platform, to run perpetual contracts related to cryptocurrencies. The CME Group argued that this constitutes unequal treatment compared to traditional banking platforms, since the CFTC has not allowed them to offer perpetual contracts since 2010, when the Dodd-Frank Act was passed, a federal law that reformed financial sector regulations.
Who is regulating?
On a federal level, the only regulations for the prediction markets have come from the CFTC. However, Congress is currently considering bills to implement regulations about prediction platforms. This week, a measure to ban insider trading on prediction markets moved forward, as well as to prohibit elected officials from placing bets on these platforms. Insider trading is banned in stock market investments but not in prediction markets.
What are the connections to the Trump family?
Donald Trump Jr., the son of the U.S. president, is tied to Polymarket and Kalshi, the two biggest prediction markets. Trump Jr. is an unpaid advisor to Polymarket, while serving as a paid advisor to Kalshi. In addition, Trump Jr. is a partner at the investment firm 1789 Capital, which holds shares in Polymarket.
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