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📅 February 9 - United States | Tensions between prediction markets and state regulators escalated to a new level when Polymarket filed a federal lawsuit against the state of Massachusetts, arguing that states lack the authority to regulate these types of event-based contracts.

📖 For state regulators, these products look too much like sports betting; for the platforms, they are derivatives regulated by the CFTC.
The immediate spark was a Massachusetts judge's ruling last month against rival platform Kalshi, determining that it could not allow state residents to trade contracts on sporting events without a state gaming license.
The decision backed up the position of Attorney General Andrea Joy Campbell, who characterized such operations as unauthorized sports betting. When Kalshi asked to stay the order while it appealed, the court denied and gave it 30 days to comply. That precedent set off alarm bells in the industry.
Massachusetts isn't alone: ​​Nevada has also taken similar steps against Kalshi, Polymarket, and partners that offer sports-linked contracts, while Coinbase faces state litigation over comparable event contract products.
However, the legal landscape is not uniform. In January, a federal judge temporarily blocked Tennessee from enforcing a cease and desist order against Kalshi, ruling that it must first be determined whether federal commodities law takes precedence over state regulations.
It is in this context that Polymarket decided to go on the offensive, taking the case to a federal court and arguing that Congress has already defined the jurisdiction: these contracts are subject to the CFTC.
The dispute also comes at a key political moment: the CFTC recently withdrew a Biden-era proposal that would have banned certain political contracts and eliminated guidance related to sports contracts, signals that many interpret as a shift toward a more pro-industry stance.

Topic Opinion:
It's not just about betting or derivatives: it's about who has the authority to define the limits of financial innovation. If the states prevail, we'll see a regulatory patchwork that could fragment these markets; if the federal approach wins, it will open the door to clearer national expansion.
💬 Do you think these markets are betting in disguise or genuine financial instruments?

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Introduction
The U.S. prediction market industry has witnessed rapid growth over the past few years, attracting retail traders and speculative capital with innovative event-based contracts. However, despite the surge in activity, analysts increasingly warn that this expansion rests on an unstable foundation. Much of the sector’s success appears to stem from regulatory loopholes rather than organic market maturity, raising questions about its long-term sustainability.
Growth Driven by Regulatory Arbitrage
According to reports cited by Odaily, the fragmented nature of U.S. state regulations has allowed prediction market platforms to thrive in regulatory gray zones. These inconsistencies enable users in certain jurisdictions to participate in markets that closely resemble sports betting, but are structured as prediction or event contracts.
As a result, platforms benefit from regulatory arbitrage, operating under federal oversight frameworks that differ significantly from traditional gambling regulations at the state level. While this has fueled growth, it has also exposed the industry to heightened regulatory risk.
Trading Volume Concentration Raises Concerns
Data from Dune Analytics reveals a heavy concentration of trading activity in sports-related markets. By 2025, sports contracts are projected to account for approximately 85% of Kalshi’s total trading volume, while Polymarket reportedly derives nearly 39% of its volume from similar events.
This reliance on sports betting-like activity raises concerns about diversification. Analysts argue that such concentration limits the industry’s resilience, making it vulnerable to regulatory crackdowns targeting sports wagering rather than broader financial prediction use cases.
Liquidity Constraints Limit Institutional Participation
Despite strong retail interest, liquidity across non-sports prediction markets remains shallow. Devin Ryan, Head of Financial Technology Research at Citizens Bank, highlights the lack of sufficient market depth as a critical weakness.
For example:
The market size for predicting January CPI inflation data on Kalshi is below $1 million
The core inflation prediction market has liquidity of less than $30,000
These figures are far below the levels required to attract institutional investors, who typically demand deep liquidity, transparent pricing, and robust risk controls before entering new asset classes.
“Fragile Prosperity” and Sustainability Risks
Industry observers describe the current state of U.S. prediction markets as one of fragile prosperity. Growth is heavily supported by:
Regulatory ambiguity
Aggressive marketing expenditures
Speculative retail participation
Should user interest decline or marketing budgets shrink, trading volumes could fall sharply. More importantly, any tightening of regulatory oversight could significantly disrupt current business models.
Regulatory Tensions and Legal Uncertainty
Prediction market platforms often position themselves as providers of event contracts, claiming oversight under the Commodity Futures Trading Commission (CFTC). However, state regulators have adopted a more cautious approach, particularly when products resemble traditional sports betting.
This ongoing jurisdictional conflict has created legal uncertainty, with experts suggesting that a U.S. Supreme Court ruling may ultimately be required to define the regulatory boundaries of prediction markets.
Conclusion
While U.S. prediction markets continue to grow in visibility and participation, their long-term outlook remains uncertain. Sustainable expansion will depend on clearer regulatory frameworks, stronger market integrity rules, deeper liquidity, and greater diversification beyond sports-based contracts.
Until these challenges are addressed, the sector’s growth may remain vulnerable to regulatory shifts and changing market sentiment.

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