Prediction markets
are booming in the U.S. They allow individuals to buy and sell binary contracts
relating to a particular event. For example, whether a particular sports team
will win a championship. While prediction markets are not limited to sporting events,
some state regulators fear they provide a means to avoid regulation of
traditional sportsbooks.
A good example of
this is the situation in Massachusetts, where Democratic Attorney General
Andrea Joy Campbell sued the prediction market operator Kalshi. This resulted
in a trial court judge issuing a preliminary injunction preventing the company
from offering trading on sports events in the state. The injunction is on hold
pending Kalshi’s appeal, but it’s looking increasingly likely that Massachusetts
will become the second U.S. state, after Nevada, to ban Kalshi from offering
sports event contracts.
Why are prediction markets controversial?
Currently,
prediction markets operate as federally regulated exchanges overseen by the
Commodity Futures Trading Commission (CFTC). This means that users who buy and
sell sports-related contracts are considered traders rather than sports
bettors.
Critics believe
that prediction markets evade sports betting regulation by exploiting legal
loopholes and positioning themselves outside the iGaming industry. The question
is how any opposition to prediction market sports trading will affect the
industry's future and whether it will eventually be regulated in the same way
as iGaming?
What the regulation of iGaming tells us
Given the
now-regulated sports betting landscape in the U.S., it’s easy to forget that
the Professional and Amateur Sports Protection Act of 1992 (PASPA) effectively
banned all sports betting in the country until it was overturned in May 2018 by
the Supreme Court in Murphy v. National Collegiate Athletic Association.
This judgment
paved the way for the legal online sportsbooks that operate in more than 30
U.S. states. This is in addition to the legal online casino industry, which
currently operates in seven states. The regulation of reputable online sports betting and
online casino sites affords enhanced customer protections, including
guaranteed withdrawals and responsible gambling tools.
Will prediction markets eventually follow iGaming?
It’s not only
Massachusetts and Nevada that have objections to the current position of prediction
markets. Other states, including Connecticut, Arizona, and Illinois, are also
taking or considering action.
A similar action
in New Jersey has resulted in a different outcome than that in Massachusetts. A
federal appeals court in the state ruled that gaming regulators could not prevent Kalshi
from allowing trading on sports events. So, the exact landscape for the future
of the regulation of prediction markets remains unclear.
The line between
prediction markets and iGaming is getting thinner. Regulators are increasingly
seeing them as adjacent to each other. There are several reasons this is
happening, including sports event contracts resembling sportsbook products,
users increasingly treating platforms as recreational rather than for hedging,
and ongoing arguments that prediction markets bypass gambling taxes and
licensing rules.
There is still a chance that the current CFTC control
model will remain, or that iGaming-style regulations could expand. Most likely,
a hybrid system will be introduced that involves federal oversight alongside
gambling-style customer protections.Related Articles
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