A trade war: how prediction markets could disrupt the status quo in the US

As the race for the White House unfolded last year, a product that could dramatically alter the landscape of the regulated US betting market was developing at a rapid rate. Event futures contracts were being traded in their millions, with Americans able to back their hunches on how they believed the election to decide the 47th president would play out. Such was the sudden surge in interest in profiting on who would win the race to the White House, Google Trends showed a massive spike in searches in the US for leading prediction markets Kalshi and Polymarket through October and up until the election on 5 November.

That’s despite the fact Polymarket was – and still is – off-limits to Americans; it was banned in the US in 2022 after failing to register with derivatives regulator the Commodity Futures Trading Commission (CFTC). Even so, Polymarket recorded $3.2bn in trading volume – a new high for the company – on the election, as per Dune Analytics. However, the platform, which is built on blockchain technology and only accepts deposits in fiat-backed stablecoin USD Coin, was investigated by the Department of Justice over concerns it had accepted Americans using VPNs.

Besides Kalshi, which was legally allowed to offer event contracts on the election, Americans were, briefly, able to do the same through Robinhood. The retail brokerage and financial services company built its offering in two weeks and subsequently racked up 507 million trades, management revealed at the company’s Investor Day in December.

The question of whether political event contracts are considered betting has long been disputed. After attempting to list markets on congressional elections in 2022, Kalshi’s efforts were thwarted by the CFTC, which argued such markets could incentivise the spread of misinformation. Kalshi responded by suing in 2023, before the CFTC amended its regulations to determine the contracts in question as “gaming” and “contrary to the public interest”. Kalshi and the CFTC presented their respective cases to the Court of Appeals in September 2024, a battle won by the Manhattan-based predictions market after the CFTC provided “no concrete basis” to suggest these markets could be used to spread misinformation.

Kalshi ended up generating $400m in trading volume on the election, and fleetingly leapfrogged ChatGPT to top the free-to-download chart on Apple’s App Store on the eve of the election. Sports event contracts soon followed in controversial fashion, with independent research firm Regulus Partners claiming that if allowed, “then the states have just lost their right to regulate and tax sports betting”. The arrival of the new type of derivatives product caused quite the stir, with the US gambling industry’s trade body, the American Gaming Association (AGA), describing it as an “unfair economic threat”. Naturally, sports event contracts captured the attention of US online operators, with numerous CEOs saying in earnings calls they were closely monitoring the burgeoning sector.

Exchange gifts

Crypto.com was the first to confirm its expansion into sports event contracts, just before Christmas. The Singapore-based crypto exchange announced it would allow users aged 18+ across all 50 US states to trade contracts on the winners of sports events such as the Super Bowl. Within a month, the CFTC placed these types of contracts under a 90-day review, requesting temporary suspension while it determined whether they breached its legal requirements. The request was ignored, as Crypto.com argued that the review contradicted recent federal court rulings, the Kalshi dispute being one.

Kalshi, too, branched out from offering all kinds of markets based around the weather and current affairs to offering markets on the winner of sports events like the Super Bowl and ice hockey’s Stanley Cup. These markets are also available nationwide to users aged 18 and over. By the time the Philadelphia Eagles toppled the Kansas City Chiefs in last month’s Super Bowl LIX, $27m had been traded on the winner at Kalshi. Robinhood attempted a similar launch, tapping Kalshi to list its own Super Bowl markets via its derivatives arm. However, the offering was pulled after less than 24 hours at the request of the CFTC.

Jeff Ifrah, co-founder and general counsel at US online gambling representative body iDevelopment and Economic Association (iDEA), analysed why Robinhood adhered to the CFTC’s request while others blanked the regulator. He believes it boils down to risk appetite. “Some companies ask for permission first, while others are willing to instead ask for forgiveness,” he says. “Some companies prioritise regulatory permission before launching contracts if they think the regulator may be concerned, while others proceed first and address compliance concerns afterwards.”

Robinhood conceded it was “disappointed” with the CFTC’s stance but said it would work to understand the concerns. The AGA weighed in, arguing the contracts in their current form “appear to circumvent state regulatory frameworks” and suggested a lack of state regulation would jeopardise tax dollars to fund public education infrastructure projects and responsible gaming (RG) programmes. While Robinhood acquiesced to the CFTC’s request, co-founder and CEO Vladimir Tenev spoke of his long-term ambitions during the company’s Q4 2024 results in February. He vowed: “We believe in [sports event contracts], and we’re going to be a leader. You should expect us to not just offer it, but continue to drive and push for regulatory clarity, industry-wide.”

Tenev’s plans to become an industry leader within the space took a step closer this month, when Robinhood rollout sports event contracts for the March Madness college basketball tournament. The contracts are housed on new prediction markets hub found within the Robinhood app.

As part of the rollout, the brokerage firm noted that the contracts, powered by Kalshi, would grant its customers the “opportunity to trade on the outcomes of some of the world’s biggest events”. The update sparked a high single-digit surge in Robinhood shares.

Kalshi CEO Tarek Mansour issued his stance on the partnership, writing on LinkedIn: “Two things Kalshi is best at: moving markets and making markets. After we went live with our prediction hub partnership with Robinhood today, their stock jumped over 9%, adding billions of dollars to HOOD’s market cap. It’s great to see prediction markets gaining the credibility they deserve from Wall Street.”

Alexander Kane, CEO of sports betting exchange Sporttrade, which is regulated in five US states, cites overregulation of sports betting as a factor in the emergence of sports event contracts. “If there was a federal way for us to operate, that would allow us to be profitable overnight; [but] we’ve decided to follow the rules and get these state licences,” he says. “It’s the reason why you’re seeing these unregulated forms of gaming; legislators have created a ‘one-size-fits-all’ approach to sports betting, which doesn’t fairly anticipate or make room for things like prediction markets.”

Even the largest online sportsbooks in the US, like FanDuel and DraftKings, must adhere to the differing rules of each state, yet others have come in and rolled out sports event contracts nationwide in one fell swoop. What’s more, in early February, Kalshi informed the CFTC of its intention to self-certify sports event contracts based on single-match outcomes, as well as contracts titled “will <achievement> be obtained by <participant>?” which would serve as a prop bet equivalent. Kalshi released an advert on Instagram declaring itself “the first nationwide legal sports betting platform” and resharing its own claims that sports betting is legal in all 50 states via its product.

More recently, Kalshi listed single tennis fixtures, allowing users to trade on which player would progress to the next round of the WTA Dubai. That development marks the first time Kalshi has offered the chance to trade contracts on individual fixtures, in what appears to be another step closer to a traditional sports betting-style approach.

Largely due to the regulatory hurdles facing operators, event contracts boast greater reach than the offerings of a sportsbook. At the time of writing, Kalshi’s sports market with the highest traded volume is its ‘Pro Men’s Basketball Champion?’ contracts, with $3.5m worth of trades. Currently, 38 states and Washington DC boast legal sports wagering, whereas these contracts can be accessed by any adult nationwide. That includes Texas and California, the two most populous US jurisdictions, which also don’t have regulated betting. So, that means Kalshi has access to a combined population of more than 52 million adults in these states.

Sports betting exchange Sporttrade, while similar to prediction markets with the UI of its offering, is hamstrung by intrastate rules. It is currently active in Arizona, Colorado, Iowa, New Jersey and Virginia, yet is unable to combine liquidity across state lines like Kalshi and Crypto.com right now. That difference is frustrating, Kane admits: “If we decide this is allowed, then there needs to be a very level playing field so that many participants can offer the same thing and compete on price and experience. Otherwise, we risk having a small pool of one or two that are operating, because they’ve decided to ignore everything that everyone else has seen for decades and have a large first-mover advantage.”

In March, Nevada became the first state to publicly push back against the sector, when the Nevada Gaming Control Board (NGCB) sent a cease-and-desist letter to Kalshi laying out that offering contracts on the outcome of sporting fixtures and elections was “unlawful in Nevada, unless and until approved as licensed gaming by the Nevada Gaming Commission”.

The letter also addressed several state regulations that Kalshi is in violation of, serving as a reminder that the platform could also face criminal charges. Despite this, CEO Mansour has vowed to “keep marching” in the face of regulatory pressure.

Crossing the divide

Robinhood’s Tenev has previously suggested the audience most likely to trade these sports event contracts – investors on his platform – are primed and waiting. It would also seem Robinhood’s clients overlap with the demographic of those most likely to bet on sports. Data from Robinhood’s Investor Day highlighted that approximately 60% of its user base is male and predominantly Millennials (born after 1980) and Gen Z (born after 1997). Millennials and Gen Z account for a combined three-quarters of customers. Meanwhile, around 35% of all Robinhood users have an annual income of between $50,000 and $100,000, while roughly 45% earn more than $100,000.

These levels of income, combined with the fact that those Robinhood users who invest in stocks and crypto and are more likely to be comfortable with risk than those who don’t, means the crossover into sports event contracts could be promising. “Robinhood in the US has a perfect customer base to also offer betting, or close to betting products,” suggests Per Carlander, director of sports strategy for LeoVegas Group. Sceptics would argue the binary ‘yes/no’ nature of prediction markets makes for a pretty mundane – even dull – product for those Robinhood customers who already bet on sports with the likes of FanDuel or DraftKings via their all-singing, all-dancing apps.

Kalshi and Crypto.com don’t currently offer features like parlays, same game parlays or in-play micro markets – and it’s not clear if they ever will, unless provided by market makers. There’s no avoiding the fact the UX of an established online sports betting product in the US is vastly superior to sports event contracts offerings. Though most operators didn’t disclose Super Bowl turnover, FanDuel accepted more than 16.6 million bets on the game, while DraftKings had over 2.5 million active customers. So, it’s doubtful bosses from both companies are having sleepless nights about the threat posed by prediction markets.

Speaking on Flutter Entertainment’s 2024 earnings call on 4 March, CEO Peter Jackson said the firm was “monitoring the situation with these sports futures contracts”. However, he said the products are “vanilla” and “lack the richness” of full sportsbooks. In the UK, where betting exchanges are more commonplace, it is still a non-mainstream way to bet. The most recent statistics released by the Gambling Commission, covering April 2023 to March 2024, show just 4.8% of the overall gross gambling yield in Great Britain is attributable to exchanges (£114.6m). Moreover, awareness of how betting exchanges function among recreational players remains limited to this day, while the UI can be intimidating and unintuitive. This could suggest the path to success for prediction markets in the US lies in its opportunities in states bereft of legal sports betting.

A new era

One potential response from the US sports betting industry could be for the likes of FanDuel and DraftKings to launch predictions markets of their own as standalone, nationwide products. Some have speculated this could be in the works as DraftKings registered ‘DraftKings Predict’ with the National Futures Association last July.

This development could benefit the largest firms, best positioned to capitalise on the increase in reach to 50 states. Sporttrade founder Kane certainly thinks so. “If I’m FanDuel, I’m getting [sister brand] Betfair [Exchange] over in the US. DraftKings and BetMGM […] these companies have not been able to build a database as strong as they’d like. Some of these states are huge; maybe they’re never going to be states from a regulated online gaming perspective, but it just won’t matter because [operators] will be able to extract a lot of value in an unregulated capacity.”

Chris Grove, partner emeritus at analyst firm Eilers & Krejcik Gaming, suggested in a recent LinkedIn post that he foresees online sports betting operators striking B2B deals with Kalshi before the next NFL season. He claimed the “collision between online sportsbooks and prediction markets is well underway” and that there is a “narrow window” for the likes of Fanatics and bet365 to “seize the initiative and create an asymmetrical vector for challenging DraftKings and FanDuel”.

Event contracts currently listed allow users to predict only the outcome of a certain fixture, as well as a futures market, such as who will be appointed the new head coach of select sports teams. The product’s limited scope may pose problems for operators, particularly ones with inferior market share, such as BetMGM. Grove told industry newsletter Earnings+More that the Entain and MGM Resorts International joint venture will have difficult decisions to make regarding whether it copies market leaders or sticks with its current offering. “Can they be competitive? Is it worth taking resources away from their current efforts to close the product gap on the sports betting front?” he queried.

It’s also important to note prediction platforms avoid many obstacles faced by licensed sportsbooks in the US, including licence fees, gaming taxes and compliance that vary state by state. Then there’s RG protocols, as well as different rules regarding marketing materials. Prediction markets failing to have robust RG policies in place is a worry for Jennifer Shatley, executive director of the Virginia-based Responsible Online Gaming Association (ROGA).

“Much like online prediction markets, the rapid expansion of sports-related event contracts is a concerning development in the gaming space,” Shatley explains. “Unlike legal online sports betting, there is little oversight. Event contracts are not required to abide by the responsible gaming best practices that ROGA promotes and are widely used by legal sports betting operators. If these contracts remain available, adequate consumer safeguards must be in place.”

It is a sentiment seemingly shared by Major League Baseball (MLB), which has also expressed concerns that sports event contracts do not offer the same integrity and consumer protection as regulated sports betting. Bryan Seeley, MLB EVP of legal operations, has urged the CFTC to implement stricter regulations on the sector to move it closer to the framework licensed sportsbooks have to adhere to. His views came in response to the regulator requesting feedback on prediction markets ahead of a roundtable later this month.

The AGA, GeoComply, and the Campaign for Fairer Gambling have all also submitted responses. The MLB’s fears centre around the fact sports event contracts do not possess the ability to flag integrity risks, with some firms offering the contracts not required to share integrity concerns with the MLB.

“As the resemblance between sports event contracts and traditional sports betting markets continues to grow, so too does the need to replicate the integrity and consumer protections that exist at the state level,” Seeley wrote in an email to the CFTC.

“Currently, those protections are lacking. For example, MLB is not aware of anything that would require exchanges and brokers to notify leagues of potential threats to game integrity, cooperate with league investigations into player, umpire, or employee misconduct, or share data for integrity purposes.”

From a regulatory point of view, a change in leadership at the CFTC could prove a welcome one for prediction markets. Brian Quintenz, a Kalshi board member and former Crypto.com adviser, is now chairman of the regulator after being nominated by President Donald Trump. Quintenz served as a CFTC commissioner during President Trump’s first term in office and has a common interest with the president’s eldest son, Donald Trump Jr, who was appointed as a strategic adviser for Kalshi in January to accelerate its “aggressive” expansion.

Between the exit of previous chair Rostin Behnam and Quintenz’s appointment, Caroline D Pham served as acting chair. She recently heralded prediction markets as an “important new frontier”. Ifrah from iDEA echoes a similar sentiment: “Sports event contracts present the sports betting and sports industries with novel instruments to hedge their business risks associated with the outcome of sports event outcomes.

“These instruments are available to other regulated sports betting entities internationally, presenting a type of innovation to the US market in the sense that these instruments have never been available here since the sports betting industry as we know it today is still growing out of its nascent stages.”

Crypto.com and Kalshi have expanded the number of sports markets offered, with the NHL, NCAA and UEFA Champions League contracts now available. If Pham’s pledge to “foster thriving prediction markets” suggested that the CFTC is unlikely to halt expansion for much longer, Quintez’s appointment as chair and the political clout that he brings with him all but confirms it.