Betting on the Future: Innovation vs. Oversight in Prediction Markets
To say prediction markets have boomed recently would be an understatement. According to the Financial Times, by the end of 2025, they had ballooned in size by 130 times compared to two years prior. Bets per month on platforms such as Kalshi and Polymarket have shifted from less than $100 million in early 2024 to over $13 billion in November 2025. Major geopolitical events, such as the current Iran war, have driven a record number of contracts, with the single event of a ceasefire between the U.S. and Iran garnering more than $170 million in bets. The unprecedented speed of prediction market growth has left regulation struggling to keep up.
Prediction markets work by allowing traders to buy different sides of a future real-life outcome; a contract outcome could be anything from the price of the S&P 500 at market close to the 2028 presidential winner, or even who will win the 4th of July hot-dog eating contest. Of the two largest prediction market platforms, Kalshi has operated more consistently in the U.S. and is regulated by the Commodity Futures Trading Commission (CFTC). Polymarket had previously restricted U.S. users following earlier CFTC enforcement actions, but is looking to re-enter the U.S. market after acquiring QCEX LLC, a CFTC-licensed Designated Contract Market.
The regulations and limitations of these markets have been highly contested. New Jersey has advanced litigation against Kalshi, arguing that federal CFTC regulation should not preempt state sports-betting laws. On April 6, 2026, the U.S. Court of Appeals ruled in favor of Kalshi. The implications of this ruling are far-reaching. The court determined that the contracts Kalshi offers are distinct from traditional sports-betting products, in part because they are traded among users rather than directly against a sportsbook, supporting their classification under federal commodities regulation. This distinction strengthens the argument for federal preemption over certain state gambling laws, though the precise boundary of state authority remains contested. States have expressed concern that sportsbooks may attempt to use this pathway to fall under CFTC jurisdiction, thereby limiting state-level regulation, differentiation and oversight.
Prediction markets have, in part, grown due to their political utility. However, until recently, it was not considered permissible to offer contracts on political outcomes. Such markets were long viewed as contrary to the public interest. Their increasing acceptance has brought both benefits and oversight challenges. Some research suggests that prediction markets can be highly effective tools for forecasting election outcomes, as they incorporate real financial incentives. Additionally, rather than presenting candidates as favored by a certain number of points, these markets allow participants to interpret implied probabilities of electoral success.
On the other hand, several clear ethical dilemmas have been raised in recent contract offerings. Contracts tied to whether certain public figures would be killed in the recent Iran war have generated significant public backlash. In early April, seven House Democrats sent a letter to the chairman of the Commodity Futures Trading Commission urging the agency to tighten its oversight of such markets. While there is no single federal statute that explicitly prohibits betting on death, such contracts would likely be unlawful under state gambling laws and could be deemed void as against public policy under general contract law principles. More broadly, regulators have the authority to prohibit event contracts that are contrary to the public interest or that create unacceptable risks of manipulation or harm. Prediction markets have attempted to avoid being directly linked to prohibited outcomes through timing mechanisms or carefully worded contract terms.
Officials have been attempting to respond to these developments. On March 10, 2026, Adam Schiff introduced legislation aimed at prohibiting contracts related to assassination, war and terrorism. The following day, Sen. Richard Blumenthal and Andy Kim introduced the Prediction Markets Security and Integrity Act, seeking to address fraud, abuse and regulatory gaps in the rapidly expanding marketplace. Additionally, there have been bipartisan efforts to limit the use of prediction market structures for sports-related betting, and in mid-April, New York began a crackdown on the prediction markets of Coinbase and Gemini.
Still, despite these legislative efforts, the pace of regulatory development appears to lag behind market innovation. The relative lack of clear, comprehensive oversight has contributed to concerns about fraud, consumer confusion and ethical boundaries. Moving forward, regulators will likely need to more clearly define the line between permissible event contracts and prohibited speculative activity, particularly in areas involving political sensitivity or potential harm. Establishing clearer guidelines and enforcement mechanisms will be critical to ensuring both the integrity of these markets and their continued viability.
Photo Credit: Wikimedia Commons
Photo Caption: Polymarket and Kalshi Logos
