Get Out of Hand

‘This Could Get Out of Hand’: Prediction Markets Force the Question on Gambling

There’s supposed to be a line between investing and gambling. Congress might have to define the difference.

By Victoria Guida

When a frenzy over buying GameStop stock took over Reddit a few years ago, some lawmakers fretted that a cheap-thrills approach to finance was the opposite of what markets are supposed to be for.

Worse, it posed dangers for people who didn’t know the full risks of fooling around with real money.

“The idea you’re going to be a responsible investor by regularly trading via your device is just plain wrong,” Rep. Jim Himes (D-Conn.), a senior member of the House Financial Services Committee, told me in 2021. “A lot of people are going to get hurt by that idea.”

Just a few years later, using a mobile device to make random bets is commonplace.

Prediction markets like Kalshi and Polymarket are the new in-your-pocket fad getting attention and denting wallets, bringing an urgent focus to the same fundamental question: What’s the line between gambling and investing?

This time, Congress might need to write the answer into law.

The issue took on new significance last year when prediction markets were allowed to enter the fray on sports betting, further blurring the distinction between trades made for financial reasons and trades made for entertainment purposes.

The traditional financial industry has noticed. And some executives are starting to raise alarms about that trend.

“We now live in a world where people think betting on the Super Bowl coin flip is a form of investing, where prediction markets process tens of billions of dollars in volume a year, and where gambling and investing aren’t even in separate apps anymore,” Stifel CEO Ronald Kruszewski said in his annual letter to shareholders last month.

Kruszewski suggested that consumers were taking their cues from technology: “When the interface makes no distinction between placing a bet and making an investment, you stop making that distinction too.”

The regulatory lines are blurring, too. And that’s where this gets more complicated.

Oversight of prediction markets has primarily been taken up by the Commodity Futures Trading Commission, a small agency created to regulate the buying and selling of financial products linked to commodities like oil, corn and wheat. But the CFTC is locked in legal battles with multiple states over who has jurisdiction over these betting platforms.

At this point, the federal regulator considers trading on prediction markets to be distinct from state-regulated gambling because there is no “house” and no central authority setting betting lines and odds. Instead, the CFTC treats it as a type of derivative contract — a “swap” — where payment is based on an event with a potential financial, economic, or commercial consequence.

There is, let’s say, considerable debate over whether every “event” on these sites fits that description (though it is true that Jesus Christ’s appearance would have significant economic implications.)

The idea is that these platforms serve a similar purpose as markets that allow companies like, say, airlines to place bets to reduce their downside if there’s a jump in the price of jet fuel.

It’s a creative argument that has its limits.

Rep. Frank Lucas of Oklahoma, another senior Financial Services Committee member, told me his constituents worry “that this could get out of hand.”

“Everything in life should not be a gambling experience,” said Lucas, also a former chair of the House Agriculture Committee, which has jurisdiction over the CFTC.

So what is the line between gambling and investment? There are a couple of ways to think about it.

In theory, financial markets are meant to help fund economic activity. A stock, for example, represents ownership in a company. Bond investors are lending money to companies and governments. Both asset classes give real people real money with the expectation that they will make fiscally responsible decisions.

That’s not what’s going on with prediction markets.

The argument that these platforms serve a productive economic purpose is more abstract. Beyond hedging risks, it’s anchored in what regulators might call “price discovery.” That is, any financial bet is a put-your-money-where-your-mouth-is assessment of what you think will happen, which markets aggregate in ways that help companies and others figure out how they should allocate their resources for the future.

Thomas Peterffy, the billionaire founder and chairman of Interactive Brokers, argued that prediction markets can offer helpful insights and that the mechanism shouldn’t be stifled because of the more “frivolous” uses of it. (His investment platform has prediction markets but doesn’t have event contracts on sports.)

Whether they are valuable or not, he told me, depends on what you’re wagering on.

“‘Will such-and-such team win over the next two minutes?’ Yeah, that’s gambling,” he said. “What the temperature rise will be over the next 10 years is not gambling.”

He added: “I would be interested in asking about serious events, rather than whether the Kardashians will get married or not.”

But there’s another half of this equation, too. What does your bet mean for you?

Stifel’s CEO, in his shareholder letter, offered one way of thinking about that question: Are you doing it to build wealth over time, or are you doing it as a fun, get-rich-quick scheme?

“Gambling is consumption,” Kruszewski wrote. “Gambling feels good right away because it’s the dopamine rush, but it doesn’t build anything.”

The companies behind prediction markets argue that it is both a useful information tool and a safer place to put money than sports gambling apps.

Elisabeth Diana, Kalshi’s head of communications, said the firm should be seen as more responsible than a pure betting site because it earns money off trading activity rather than outcomes. The company’s profits depend on people using the platform, not on them losing.

“Our revenue does not equal the loss of someone’s winnings,” she told me. “We don’t hook losers and kick off winners.”

But what about for the investors-or-bettors themselves? Policymakers might want to consider that for the person taking a position on these markets, the products look pretty identical to gambling.

Even if you are inclined to view these platforms as selling derivative contracts, their novelty and near-universal accessibility may make them a different regulatory puzzle.

 “Should you have age restrictions in our futures markets?” Selig said. “We’ve never had that before, but maybe that’s something that the public is going to ask for.”

That would be a step toward treating these markets a bit more like gambling. Sports betting platforms are generally off limits to anyone under 21, while Kalshi is open to anyone at least 18.

But there are broader legal questions Congress might consider.

In the wake of the 2008 financial crisis, federal lawmakers explicitly barred trading linked to “gaming,” an ill-defined term that the CFTC argued up until President Donald Trump’s inauguration covered everything from election betting to sports wagers.

The CFTC now uses a much narrower interpretation, opening the floodgates for those categories of bets. Congress could further define that term if they don’t agree with the agency.

There are sterner steps lawmakers could conceivably take. Mick Mulvaney, a former representative who was also White House chief of staff in Trump’s first term, said Congress should simply ban sports contracts on prediction markets.

Mulvaney told me he loves gambling, but he’s now fighting against prediction markets’ foray into sports betting as head of a group called Gambling Is Not Investing. He said he’s started reaching out to “key people” on the Hill and conducting staff briefings.

The policy discussion is still nascent, but so far, Mulvaney said he’s “pushing on open doors.” He’s optimistic that Congress is ready to take on the dilemma his group is named for.

“Every now and then you get lucky on topics, and you strike at the right time,” he said. “This is on the front burner.”