Derivatives, Commodities, or Gambling? The Regulatory Crossroads Ahead
From Signal to Scrutiny
In Part 1, we looked at why prediction markets have captured so much attention: they turn opinion into signal by putting real money behind being right. That same mechanism is what makes them powerful—and what now places them under a microscope.
As prediction markets scale, they stop being an interesting forecasting tool and start looking like something else entirely: a regulated financial product, a form of gambling, or something uncomfortably in between. That ambiguity is no longer academic. Regulators are weighing in. Tribal gaming leaders are pushing back. Courts are being asked to decide where these products fit—and who has regulatory jurisdiction when federal oversight collides with state gaming law and tribal compacts.
This is the moment prediction markets move from novelty to policy conundrum. And understanding how they’re regulated—and where the gaps are—is now essential for anyone building, advising, or investing in this space.
California is where this tension is playing out most clearly, offering a real-world test of how prediction markets may be treated as they move into the mainstream.
The U.S. Regulatory Framework (in Plain English)
Under U.S. federal law, many prediction markets operate as event contracts regulated by the Commodity Futures Trading Commission (CFTC). In this framing, prediction markets aren’t gambling—they’re derivatives. Participants aren’t betting against the house; they’re trading contracts priced by supply and demand.
That distinction matters. CFTC oversight focuses on market integrity: transparency, orderly trading, surveillance against manipulation, and fair access. It’s a framework designed for financial markets, not casinos.
But state gaming regulators and tribal authorities don’t always see it that way—especially when prediction markets look and feel a lot like sports betting. When contracts reference sporting events, elections, or pop-culture outcomes, the difference between “event contract” and “bet” can feel semantic to regulators whose job is to protect consumers and enforce gaming laws.
This is where friction begins. Federal law may permit something that state law—or tribal compacts—explicitly reserve or restrict.
When Big Platforms Enter, the Stakes Change
Prediction markets stopped being niche the moment mainstream platforms took interest.
Crypto-native players helped prove demand. Regulated exchanges demonstrated a legal pathway. But when large consumer platforms and trading apps began exploring prediction markets, the conversation shifted.
For these companies, prediction markets aren’t just an experiment. They’re a product category—one that can sit alongside trading, investing, or wagering, depending on how it’s structured. That kind of distribution brings scale, scrutiny, and expectations that go far beyond a handful of early adopters.
Growth at this level attracts regulators for a simple reason: impact. The more users involved, the more money at stake, and the more visible the risks become—especially when those risks cross jurisdictional lines.
California as the Test Case
Nowhere is this collision clearer than in California.
Three tribal governments filed suit alleging that sports-linked prediction markets offered by platforms like Kalshi and Robinhood violate the Indian Gaming Regulatory Act and existing tribal-state compacts. The argument is straightforward: these products look like sports betting, operate at scale, and compete directly with gaming activities that tribes have exclusive rights to offer.
A federal court allowed Kalshi to continue operating while the case proceeds—but that ruling didn’t resolve the underlying question. It merely underscored how unsettled the law still is.
Similar tensions are emerging elsewhere. State attorneys general have issued warnings. Platforms have pushed back. In some cases, companies have preemptively sued states to clarify whether gaming laws apply to prediction markets at all.
This isn’t just legal wrangling—it’s a jurisdictional tug-of-war. Federal derivatives oversight on one side. State gaming authority and tribal sovereignty on the other. Prediction markets sit directly on the fault line.
Market Integrity vs. Consumer Protection
At the heart of this debate is a tradeoff regulators haven’t fully resolved.
CFTC oversight is strong when it comes to market integrity. It emphasizes transparency, fair access, price discovery, and surveillance against manipulation. These are the right tools for ensuring that markets function as markets.
But consumer protection in gambling looks different. State gaming regulators focus on responsible play, addiction mitigation, advertising restrictions, and protections for vulnerable users. Those safeguards aren’t always embedded in financial-market frameworks.
Prediction markets live in the gap between these systems.
Supporters argue that markets with price discovery and transparency are inherently safer than opaque betting products. Critics counter that when real money is involved—and when outcomes resemble games of chance—consumer protections should follow, regardless of how contracts are labeled.
That gap is what policymakers are wrestling with now.
Manipulation, Influence, and Narrative Risk
There’s another layer of concern regulators can’t ignore: influence.
Smaller, thinner markets are easier to move. A large trade can shift odds quickly, even without illegal manipulation. In politically or culturally sensitive markets, those price movements can ripple outward—picked up by social media, cited by commentators, or interpreted as “what the market thinks.”
Not all of this is necessarily illegal, though we’ll leave that to the lawyers. Some of it may be perfectly permissible under current rules. But when large sums of money intersect with public narratives, the risk isn’t just financial—it’s informational.
This is especially true in markets tied to political outcomes, regulatory decisions, or messaging. Even when no one breaks the law, the perception of influence can be enough to draw scrutiny.
And perception matters when regulators are deciding how aggressively to step in.
What This Means in Practice
For builders, operators, and investors, the takeaway is simple: compliance can’t be an afterthought.
If you’re operating anywhere near prediction markets, you need to be thinking about:
- Licensing posture: Federal, state, and tribal considerations don’t always align.
- Geofencing: Where users can access markets—and where they can’t.
- KYC and AML: Financial-grade identity and transaction controls.
- Consumer protection: Disclosures, risk messaging, and responsible-use frameworks.
- Marketing transparency: How products are positioned matters as much as how they’re built.
- Market surveillance: Monitoring for manipulation, coordination, or abuse.
Prediction markets may surface powerful signal—but power without guardrails rarely lasts.
Signal Needs Safeguards
Prediction markets are no longer just an interesting idea. They’re a real product category operating at the intersection of finance, gambling, technology, and public policy.
That’s why regulators are paying attention. Not because prediction markets don’t work—but because they do.
If you’re building, advising, or investing in this space and want to navigate these questions with clarity, now is the time to engage them seriously.
Book a discovery call with BitAML. We’ll help you think through the compliance, consumer-protection, and regulatory realities shaping prediction markets today—before those questions become constraints tomorrow.
