Prediction markets are booming—Robinhood's event-contract revenue hit $156 million, up more than tenfold year over year, as the segment expands into crypto and economic contracts, and prediction-market operator Kalshi is finalizing a new funding round at roughly $40 billion valuation — reportedly its last before an IPO anticipated as soon as next year — an eightfold jump in a year, while Polymarket hired former Goldman Sachs partner Lisa Mantil to lead its institutional push. But the industry faces mounting scrutiny: prediction markets bypass state gambling rules, insider-trading scandals (including a soldier betting on classified military operations) are proliferating, and economists are calling for cash-only friction to curb problem gambling. New York is suing both Polymarket and Kalshi as illegal gambling operations, Polymarket has pulled New York's case into federal court while separately suing state gaming officials, and the Sixth Circuit has ruled Ohio and Tennessee can regulate Kalshi's sports contracts under gambling law—deepening a federal circuit split that raises the odds of Supreme Court review. A second Sixth Circuit panel has now ruled unanimously against Kalshi, holding that its sports-event contracts do not meet the statutory definition of 'swaps' and that even if they did, the Commodity Exchange Act does not preempt state gambling laws—another signal that states can crack down and that the regulatory fight may head to the Supreme Court. Federal regulators have voiced concerns about wagers on bank failures. ProPublica's investigation found DraftKings made a reporter deliberately betting like a problem gambler a VIP—rewarding loss-chasing with perks—while Massachusetts probes the company's use of AI to target losing gamblers. The sector's explosive growth is colliding with regulators, states, and even the White House's own crypto entanglements.
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