As prediction markets like Polymarket and Kalshi gain traction in the crypto space, they’ve faced increasing scrutiny from regulators who view them as thinly veiled gambling platforms. Singapore, Thailand, and Taiwan have all moved to ban Polymarket, arguing it’s no different than sports betting. But according to New York crypto attorney Aaron Brogan, this view fundamentally misunderstands how prediction markets operate.
The Case Against Calling Prediction Markets Gambling
On the surface, the comparison seems logical. Polymarket allows users to bet on the outcomes of everything from elections to wars to sporting events. The latter especially makes it seem like just another online sportsbook. But as Brogan explains, there are key structural differences:
“If you are a state-licensed gambling product, then you are taking one side of the bet. You’re essentially betting against your users,” Brogan said. “Prediction markets like Polymarket and Kalshi, in contrast, act as neutral intermediaries that match trades without taking a side, making money via transaction fees.”
– Aaron Brogan, crypto attorney
This neutrality fundamentally changes the incentives involved. While casinos famously ban successful card counters and handicappers, prediction markets have no reason to boot their most skilled users. Their profits aren’t tied to users’ losses.
“Prediction markets aren’t gambling because they’re not structured to be,” Brogan argues. “They’re tools for understanding, hedging, and creating public goods. That’s what makes them fundamentally different.”
The Regulatory Framework For Prediction Markets
So if major betting operators like DraftKings and MGM wanted to offer election and current events markets, could they simply register as prediction markets instead of sportsbooks? Not quite. As Brogan explains:
“In the U.S., prediction markets that are registered as Designated Contract Markets fall under federal regulation via the Commodity Exchange Act, which preempts state gambling laws. The states can’t regulate you.”
– Aaron Brogan, crypto attorney
This is the approach taken by Kalshi, which fought the CFTC to approve election-related markets. It recently launched Super Bowl betting, confident its federal registration as a DCM shields it from state gambling laws.
Unregistered markets may not have the same protections though. “Polymarket, for example, is not registered in the United States, so arguably, states could go to its founder and say, ‘You’ve been facilitating sports betting, which is a felony in this state,’ and bring legal action,” Brogan notes.
A Regulatory Shortcut And The Threat To Sportsbooks
Registering as a DCM is no small feat. But some prediction market entrants like Crypto.com have found a regulatory shortcut: self-certification.
“The key thing is, if the CFTC does not take action within 24 hours after the self-certification papers are filed, then the applicant can treat that as a green light,” Brogan explains. This could open the floodgates.
“If these are able to proliferate, and if the CFTC doesn’t take action…they’re going to end up eating these sportsbooks’ lunch. This is a $21 billion industry, and this new product is going to be way better.”
– Aaron Brogan, crypto attorney
The implications are massive. If crypto prediction markets can offer sports betting nationwide without the state-by-state licensing headaches, they could rapidly steal market share from entrenched giants like FanDuel and Caesars. The regulatory arbitrage enabled by their unique structure and novel registration process may prove too powerful to overcome.
Of course, this all hinges on regulators maintaining the distinction between prediction markets and gambling – a distinction that may seem semantic to some. But Brogan makes a compelling argument that the differences are not only real, but fundamental.
From their neutrality to their federal oversight to their ultimate purpose, he contends prediction markets simply operate in a different realm than casinos and sportsbooks. For the disruptive potential of platforms like Polymarket and Kalshi to be realized, regulators will need to be convinced of this as well.
