Here's A Prediction For You

Prediction markets foray into sports has rankled licensed sportsbooks and triggered a flurry of legal and regulatory scrutiny.

Prediction markets are elbowing their way into the domain of licensed online gambling operators, setting the stage for an intriguing showdown that is not just about new competition but also about challenging the regulatory and operational norms that have shaped legal sports betting in the US.

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Before diving into today’s topic, let me be clear: I am not opposed to any new product or model. Whether it’s a traditional online poker site, a sweepstakes casino, or a prediction market site offering sports contracts, I simply want a safe, regulated environment where the rules are made plain. That means proper AML/KYC, integrity, responsible gaming, and consumer protections are in place, with oversight ensured.

Okay, now let's go back to today’s scheduled programming.

I’ve been getting a lot of questions about the future of prediction markets:

• Will they get restricted or prohibited?

• Are they a potential challenger to DraftKings and FanDuel?

I can’t answer either of those questions with any level of certainty (no one can), but my general thoughts are:

• Yes, they will get restricted in some ways/places and brought into the regulatory fold in others. Like DFS 1.0 and 2.0, there will be positive and negative regulatory opinions (CFTC opinions and rules can change from administration to administration), legislation, and court decisions.

• As currently constituted, no. As with any other “massive” database, any company jumping into sports betting at this point in time has to assume that their customers are already betting elsewhere (including in California, Texas, and other yet-to-legalize states). If your product isn’t as good, good luck pulling customers away from DraftKings, FanDuel, et al.

I’d also add that the tailwinds for election markets have turned into headwinds for sports markets.

The industry was silent when election markets went live, but sports is an altogether different animal and is causing tension between existing licensed sportsbooks and prediction markets.

Stay In Your Lane

Like DFS 2.0, there are structural differences between prediction markets and sportsbooks. One of the best explanations of this I’ve seen comes from Sportico, which summarizes the difference between traditional sports betting products and prediction markets thusly:

“A basic technical difference between event futures trading and sports betting is that event futures trading features only two possible choices priced solely by the actions of other investors while betting pits users against the book and its built-in edge.”

But what the prediction market sites offer will elicit different responses.

Election markets are quite different than sports, just as sports betting is quite different than online casinos. Outside of the Iowa Electronics Market and PredictIt — which the CFTC has long allowed to set markets (with risk capped at $500) for research and education purposes — election markets weren’t available until Kalshi prevailed in court just before the 2024 elections.

The same was true of sports betting, which was off-limits (except for Nevada) until the Supreme Court repealed PASPA in May 2018.

In both cases, no other entity had skin in the game, so there was no threat of cannibalization and, therefore, little opposition. However, with legal sports betting now available in 39 states, Kalshi and other prediction markets aren’t on virgin soil. They are stepping on some big toes and discovering that entrenched entities have a deep protectionist streak, just like with online casinos, only this time the entire industry is on the same page.

In its first official statement on prediction markets, the American Gaming Association recently said:

“The American Gaming Association is concerned with current efforts by certain trading platforms and digital exchanges to launch national sports event contracts that appear to circumvent state regulatory frameworks. Legal, regulated gaming in the U.S. – including sports betting – has worked with state and tribal regulators to develop regulated markets that protect consumers, promote responsibility, and support states and tribal communities in the form of tax revenues.

“The proceedings at the CFTC prompted by current efforts raise important questions, and the AGA further urges these companies to cease offering sports event contracts during the CFTC’s review period. Failure to sustain and uphold state regulatory frameworks on sports wagering poses potential consumer risks and jeopardizes state revenues dedicated towards critical priorities, such as public education, infrastructure projects, and responsible gaming programs and problem gambling services.”

Momentum or Mirage?

When you talk to anyone bullish on prediction markets, they’ll tell you that reading the tea leaves suggests a promising trajectory for these platforms, with potential for significant growth and product enhancement, not to mention a 50-state market.

That said, they are also making some fingers-crossed assumptions.