In a significant move, Singapore and Thailand have both enacted bans on Polymarket, a popular prediction market platform, citing concerns that it operates merely as a gambling service. This argument, while seemingly straightforward, warrants a deeper examination of the fundamental distinctions between prediction markets and traditional gambling platforms.
At first glance, the opposition might appear valid. Polymarket’s offerings include sports prediction markets, positioning it as a competitor to established sportsbooks globally. However, the implications of prediction markets extend beyond mere gambling, raising questions about their inherent value as tools for risk management and event hedging.
While even the fiercest critics of prediction markets recognize their potential in helping investors hedge against significant events such as elections, the same cannot be said for sporting events, which often lack the consequential weight of larger global occurrences.
New York-based attorney Aaron Brogan contends that labeling prediction markets as a mere evolution of gambling fails to acknowledge their unique operational structure. As he explains, state-licensed gambling operators take a position on the bets, effectively wagering against their own users. This model inherently relies on the odds they establish to ensure profitability. In contrast, platforms like Polymarket and Kalshi serve as neutral facilitators of trades, generating revenue solely through transaction fees.
“You are not taking a side of the bet as the market in that case, which fundamentally changes the incentives involved and makes the product different in a holistic way,” Brogan asserts. This neutrality allows prediction markets to function without the risks and constraints faced by traditional gambling establishments, which often bar successful users to maintain their profit margins.
Brogan further emphasizes that prediction markets are not designed as gambling platforms but rather as tools for creating public goods, understanding complex events, and managing risks.
In the United States, acquiring an online gambling license has been an arduous process, prompting speculation about why established players in the sportsbook sector—such as DraftKings and MGM—have not pursued regulation of prediction markets. The core legal distinction, as noted by Brogan, lies in the regulatory frameworks governing these platforms. Prediction markets registered as Designated Contract Markets (DCMs) fall under federal regulation via the Commodity Exchange Act, which supersedes state gambling laws.
“Federal law in the United States preempts state law,” Brogan states. “The Commodity Exchange Act includes a specific provision that precludes state regulation of federally registered derivatives. If you are federally registered, the states can’t regulate you.”
Kalshi’s active pursuit of registration with the Commodities Futures Trading Commission (CFTC)—alongside their recent launch of Super Bowl betting markets—illustrates confidence in this legal interpretation. However, challenges remain for competitors like Polymarket, which isn’t registered in the U.S. This lack of registration may expose its founders to legal action for facilitating sports betting, a crime in several states.
Meanwhile, the nascent landscape of prediction markets is expanding, with new entrants emerging to capitalize on this evolving framework. Among these is Crypto.com, which recently launched its own sports betting platform following self-registration as a DCM with the CFTC.
Brogan explains the significance of the CFTC’s response time: “If the CFTC does not take action within 24 hours after the self-certification papers are filed, then the applicant can treat that as a green light.” Should these platforms continue to gain momentum without regulatory pushback, they could disrupt traditional sportsbooks significantly, capturing a share of what is currently a $21 billion industry.
In conclusion, as regulatory landscapes evolve, understanding the operational and regulatory distinctions between prediction markets and traditional gambling platforms will be crucial for both users and regulators alike. With developing technologies and legal frameworks, the future of prediction markets looks promising, potentially reshaping the betting landscape as we know it.
