A banner week for prediction markets

TL;DR: Prediction markets are booming, but the guardrails aren’t keeping up. After Kalshi took in a record $871 million in Super Bowl bets, Washington signaled it may let the industry shape its own oversight, continuing the long-standing US tradition of trusting tech companies to police their own behavior.

What happened: At the same time New Yorkers were lining up to enter the city’s first free Polymarket grocery store/PR stunt yesterday, the Commodity Futures Trading Commission—the federal agency that oversees prediction markets and derivatives—effectively handed the industry a seat at its own regulatory table. New CFTC Chairman Michael Selig announced an Innovation Advisory Committee tasked with examining how “breakthrough innovations” are “transforming markets.” In plain English: A group originally established to oversee cattle futures has decided it’s out of its league and needs online betting companies to write their own playbook.

The 35-member panel is stacked with insiders: Kalshi CEO Tarek Mansour, Polymarket CEO Shayne Coplan, plus top execs from FanDuel, DraftKings, Robinhood, and Coinbase. Noticeably missing? Any industry skeptics.

How we got here: In 2018, online sports betting was illegal almost everywhere. Today, 90% of sports bets are placed on phones. Prediction markets saw how much people liked wagering on hyperspecific outcomes—like whether LeBron would hit a three-pointer at exactly 12:37 in the first quarter—and stretched that model to everything: politics, celebrity gossip, war, and plenty of tech product launches. The typical user is a young man; one recent analysis claimed that prediction market traders lose money at a faster rate than traditional gamblers do.

The house might have an edge: With more money and users flowing in, so is suspicion that the game is rigged. During the Super Bowl, more than $47 million was wagered on halftime show bets. The next morning, Kalshi’s CEO was asked on CNBC whether a backup dancer betting on the opening song would count as insider trading. His answer: If the information is considered “nonmaterial” and socially acceptable to share, it’s “totally fair game.”

That ambiguity (read: sketchiness) gets at the heart of prediction markets. Unlike securities law, CFTC anti-fraud rules typically require deception or breach of duty, a higher bar than the Securities and Exchange Commission’s. That means people can often bet on outcomes they have advance knowledge of. One Polymarket trader reportedly made nearly $410,000 betting on Nicolás Maduro’s capture hours before it was announced. Was the bettor lucky or a government employee with prior knowledge?

Not everyone’s buying in: Even as the industry surges, unease is growing. Among men under 30, the share who say legal sports betting is bad for society has more than doubled in three years—from 22% to 47%. Meanwhile, at least eight states have taken action against prediction markets, issuing cease and desist letters, filing lawsuits, or opening investigations. But until anything changes, people will bet more, lose more, and feel worse about it—which, so far, appears to be part of the business model. —WK