SCCG Research: Drawing the line between prediction markets and gambling
SCCG Research provides Gambling Insider with its latest excerpt, exploring the legal and ethical challenges brought about by prediction markets and where the industry needs to draw the line.
Prediction markets inhabit a murky space between regulated financial instruments and traditional gambling. This section explores how these markets compare and contrast with gambling, examining the legal definitions, the role of skill vs. chance and societal concerns (including the risk of moral hazard). The core question is: When does trading on event outcomes stop being a financial service and start being a bet? The answer varies across jurisdictions and is at the heart of the current debate.
Legal boundaries – commodity contracts or wagers?
Under US law, the distinction between a regulated prediction market and gambling often hinges on regulatory definitions and intents rather than the mechanics of the activity. The Commodity Exchange Act (CEA) broadly defines a “commodity” to include all goods and articles, and even “all services, rights and interests… in which contracts for future delivery are presently or in the future dealt in.” This open-ended definition has been interpreted to cover event contracts – essentially treating an event outcome as the underlying commodity. Thus, when a platform like Kalshi lists an event contract, it argues that it is listing a type of futures contract, squarely under CFTC jurisdiction. By contrast, state gambling laws define a “bet” or “wager” typically as staking something of value on an outcome largely or wholly determined by chance (or outside one’s control) with the intent to win something of value. For example, Montana’s law defines gambling in part as risking money on an outcome “contingent…upon chance.” State regulators have seized on such definitions to claim Kalshi’s markets are bets: Participants risk money on a sports game or election result (an outcome they cannot control), hoping to gain profit, which fits the gambling definition in their view.
The CFTC itself in Regulation 40.11 has acknowledged a category of “prohibited gaming contracts” – it forbids the listing of derivatives contracts that involve “gaming or an activity that is unlawful under any State or federal law.” Historically this was aimed at things like contracts on assassination or inherently criminal activities. But in 2023, the CFTC controversially extended this logic to election contracts, essentially labelling them as “gaming” (gambling) contracts not in the public interest. Kalshi’s victory in court pushed back on that, with the judge noting that the CEA does not explicitly ban election or sports event contracts and that the CFTC did not convincingly demonstrate why they should be deemed gambling and against public interest.
In summary, federally a prediction market can be legal if it is run on a registered exchange, unless explicitly deemed against public interest by the CFTC. State-wise, any prediction market not federally sanctioned would likely be considered illegal gambling if it involves real money on event outcomes. This is why Polymarket (unregistered) got in trouble, and why state regulators are challenging Kalshi’s sports markets despite Kalshi’s federal status – they argue those contracts violate state gambling prohibitions (e.g., in states where betting on sports or elections is illegal, any such activity, even via a CFTC exchange, might be viewed as breaking state law). Kalshi’s counterargument is federal preemption: That the CEA preempts state law in this domain, akin to how federally regulated securities or futures cannot be second-guessed by state gambling statutes.
The skill vs. chance element also plays a role in these legal distinctions. Gambling is often characterised by predominance of chance, whereas trading or investing is often defended as requiring skill. Prediction market advocates argue that successful traders engage in research, arbitrage and informed speculation – activities requiring skill, analysis and even creating liquidity and price discovery beneficial to others. In their view, this is closer to stock trading (skillful analysis of companies) than roulette. However, gambling regulators retort that from the player’s perspective, betting on a football game or stock price movement is not so different – both involve risk under uncertainty, and chance plays a significant role no matter the skill level. The Arizona Department of Gaming bluntly stated in its 2025 letter that there is “no meaningful difference” between buying a sports outcome contract on Kalshi and placing a bet with a sportsbook.
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