Prediction Markets Emerge in Gray Areas of Gambling Regulation

The rise of prediction markets reflects a significant shift in the gambling landscape, particularly as these platforms operate in unregulated areas. Major prediction markets are currently facing legal challenges in the United States, with states like Arizona moving to ban certain operators. State governments argue that these services circumvent essential gambling licensing laws, while prediction markets assert they do not fall under state-level regulation.

While there are similarities between prediction markets and traditional gambling venues, such as sportsbooks, they also offer unique betting opportunities that diverge from conventional practices. For instance, local betting shops typically do not provide odds on events such as what a technology CEO will announce in a corporate meeting. These unconventional bets are attracting a younger audience, particularly those under the age of 30, who view participation in prediction markets as a form of engagement rather than gambling.

Ismail Vali, CEO and founder of Yield Sec, noted the appeal of these markets for younger individuals. “Under-30s don’t think they’re gambling,” he stated. “They genuinely believe they’re predicting. Whatever that means, but it’s not gambling when it absolutely is.”

Regulatory Challenges for Prediction Markets

The rapid growth of prediction markets can be attributed to their operation within a legal gray area. Currently, they are overseen by the Commodity Futures Trading Commission (CFTC), which classifies them as derivatives exchanges. Companies such as Kalshi are actively collaborating with the CFTC to maintain this regulatory relationship, avoiding the fragmented state-by-state oversight faced by traditional gambling establishments.

Braden Perry, an attorney with Kennyhertz Perry, LLC, emphasized the regulatory challenges posed by prediction markets. “They borrow mechanics from futures and options markets, behavioral incentives from gambling, and speech-based framing that resembles polling or forecasting. That hybridity creates regulatory ambiguity, which is where innovation thrives,” he explained.

This ambiguity allows developers to create products that skirt existing regulations by emphasizing skill over chance or using contracts instead of traditional wagering methods. “This is not accidental. It’s a direct response to highly prescriptive gambling statutes that leave little room for licensed experimentation,” Perry added.

Innovation and Regulation in Gambling

As prediction markets continue to evolve, they stand at a pivotal moment in their development. The lack of specific regulations, aside from those governing derivatives exchanges, provides a unique opportunity for innovation. While this open environment benefits consumers by offering diverse betting options, it also raises concerns regarding potential risks for both users and third-party operators.

Perry noted that regulatory bodies often react to developments in this sector only after issues arise. “Agencies typically wait for scale, harm, or public visibility before stepping in, especially when jurisdiction is unclear,” he remarked. This delay allows for experimentation but could lead to unforeseen consequences.

A recent incident involving Coinbase CEO Brian Armstrong illustrates the potential for manipulation in prediction markets. During a quarterly earnings call on October 30, 2025, Armstrong referenced tracking a prediction market related to Coinbase’s announcements. His light-hearted comment highlighted how easily event contracts could be influenced, raising questions about the integrity of such markets without proper regulations. “I just want to add here the words Bitcoin, Ethereum, blockchain, staking, and Web3, to make sure we get those in before the end of the call,” he stated.

The absence of a robust regulatory framework underscores the need for authorities to establish guidelines that protect all stakeholders involved. As prediction markets gain traction, both state and federal organizations will need to adapt to this evolving landscape.

Historically, many regulated gambling products emerged from similar gray areas, including daily fantasy sports and online poker. Perry concludes, “Grey areas aren’t a bug in gambling regulation; they’re a structural feature of how innovation tests outdated legal frameworks.” As the industry continues to evolve, the balance between innovation and regulation will remain crucial for the future of gambling.