The Legality of Prediction Markets: Gambling or Financial Trading?

Prediction markets let bettors trade contracts tied to whether a future event happens. This might be regarding a candidate winning an election – the contract might pay $1 if the candidate wins and nothing if they lose. If the contract trades at 0.75, the market is implying there is a 65% probability of the outcome. 

People can buy in, sell out, and adjust their positions as they learn of new information. This is the same as in trading short-dated derivatives. The platforms offering prediction markets argue that this trading process helps aggregate information and improve forecasts on various markets: policy decisions, sports results, economic data releases, corporate earnings and more. 

But are these markets legal? Are they gambling markets, or financial trading? And is their legality in question?

US regulation

In the US, at the federal level, prediction markets operating on CFTC-regulated exchanges are generally considered legal. Platforms like Kalshi and Polymarket bring at least part of their activity within that framework. Kalshi was rated among the best prediction market apps at Casino.org, which offered an exclusive code for new users but pointed out the variable fees that can take a few trades to get comfortable with. (That review site also covers news about prediction markets and recently reported on a new study by Bitget Wallet and Polymarket indicating that of the 1.29 million active wallets on that platform, only 2.5% drove over $100,000 in trading volume in the first quarter of this year. That matched previous data showing that the average trade size on Polymarket was only $89 and that 80% of users place bets/trades at under $500.)

Some argue that certain event-based markets, particularly in sports, should fall under state gambling laws (instead of, or in addition to, federal derivatives rules). The tension around this has produced cease-and-desist letters, geo-blocking, and litigation. Some platforms are excluding customers in states where the legal risk is higher.

Europe and UK regulation

Regulation is different across Europe. Some countries view prediction platforms as betting and require licenses; some have blocked unlicensed operators. Newer rules on crypto assets and derivatives are catching up with event-based products, which could push operators toward clearer gambling categories: they will be encouraged to “pick a lane” and make their markets either look like a regulated derivatives value or like a betting market, instead of sitting in a grey area. 

The UK has a clearer stance than many other jurisdictions: prediction markets that look like betting exchanges are treated as gambling. These markets are supervised by the Gambling Commission, meaning operators need a license. They must follow responsible gambling rules and can’t simply rebrand their markets as financial products to avoid regulation.

One factor in whether a prediction market is treated as gambling or financial trading is what the contracts are tied to: win/lose payoffs on elections and sports scores are easier to frame as bets; contracts referencing indices, interest rates, or other financial benchmarks fit more into derivatives rules.

Arguments for treating these markets as gambling

Those who see prediction markets as gambling point to the familiar risks. Users can lose their entire stake quickly, and many are drawn in by the hope of a possible win and do not have a clear risk-management strategy. Problem gambling, impulsive behaviour, and the potential for significant losses are concerns familiar to anyone familiar with gambling regulation and debates.

Critics also note that markets on elections, conflicts, and other sensitive events can feel uncomfortably close to monetizing real-world harm.

Trading interfaces arguably make high-frequency betting seem more respectable than it is. A more polished order book and candlestick chart do not change the basic fact that most people are speculating on binary outcomes and, in many cases, there will be losses.

For regulators, it may seem safer to keep these products inside existing gambling frameworks, where there are established rules on advertising, age checks, and responsible-gambling tools.

Arguments for treating them as financial trading

Supporters of prediction markets say that treating them purely as gambling misses their informational value. A liquid market on interest-rate decisions or policy reforms can synthesize dispersed information and give a clearer picture of expectations than polls or analyst notes. From that angle, event contracts look like another sort of derivative used for hedging specific risks or extracting forecasts (not just for entertainment).

They also argue that financial regulation, when applied properly, can offer stronger safeguards than gambling rules. Requirements around disclosure, capital, market integrity, and surveillance may help limit fraud, manipulation, and unfair practices

Where this leaves users and gamblers

Someone trying out a prediction app needs to know whether they’re dealing with a betting operator or a regulated trading venue, what protections are in place, and how outcomes like tax treatment or withdrawal limits work.

For operators, gaining a gambling licence can simplify access to entertainment-focused markets in some jurisdictions but may limit the ability to market the product as a serious trading tool. The derivatives-style route opens doors to more institutional users and different regulation – at the cost of heavier compliance and closer scrutiny of what kinds of markets can be listed. 
It’s not entirely clear right now whether regulators will converge on a single approach or keep treating similar products differently, so both gamblers and operators are having to navigate an environment where the same trade is seen as a bet in one place and a financial contract in another.