Prediction markets experience explosive growth, but also new legal challenges

Prediction markets have come of age. Kalshi, the industry leader, is enjoying its biggest year ever. Monthly trading volumes surpassed $37 billion in July, boosted by the World Cup. The startup is raising new capital at a $40 billion valuation, about four times what it was worth just eight months ago, and the CEO speaks of an initial public offering as soon as 2027. With this impressive growth comes heightened risk. Looming questions concerning its regulatory status and market integrity threaten to upend Kalshi’s business model, while mounting state and federal lawsuits suggest an eventual date with the Supreme Court.

Kalshi was founded in 2018 by Tarek Mansour and Luana Lopes Lara, who met at MIT and serve as CEO and chief operating officer, respectively. As undergraduates, the founders secured various Wall Street jobs and internships: Mansour worked as a derivatives analyst at Goldman Sachs, while Lopes Lara held roles at Bridgewater and Citadel. On Wall Street, the founders observed how institutional investors sought to trade such uncertain binary outcomes as Brexit and the 2016 presidential election through proxies such as swaps, options, and other risk curves. In their telling, Kalshi was established to resolve a simple question: Why not just trade on the binary outcome itself?

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” data-large-file=”https://www.conservativenewsdaily.net/breaking-news/wp-content/uploads//2026/08/localimages/Fea.Unpredictable.082626.jpg?w=696″ height=”658″ width=”1024″ “https:>An advertisement for Kalshi hangs in downtown Washington, D.C., April 1, 2026. (Allison Robbert/AP)

Jeffrey Bandman, a former Commodity Futures Trading Commission official who led Kalshi’s regulatory strategy from 2019 and has returned after a two-year hiatus, told me that the founders were determined to build the business in close cooperation with regulators. “They understood early on that taking regulation seriously could be a competitive advantage,” he said.

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At the moment, a duopoly of Kalshi and Polymarket controls 97.5% of the industry. While Kalshi was born in close cooperation with federal regulators, requiring know-your-customer and presenting itself more like a traditional fintech, Polymarket has taken a more libertarian approach, accepting crypto wallets in lieu of identification and handling international business from an offshore entity registered in Panama.

Kalshi has the backing of Silicon Valley kingmakers such as Sequoia Capital and a16z, while rival Polymarket has been financed by Founders Fund and Intercontinental Exchange, the company that owns the New York Stock Exchange. Given the level of investment, it seems doubtful that the long-term play is a regulatory arbitrage on sports betting. Investors believe that prediction markets could become a massive new asset class, both a forecasting tool that aggregates dispersed knowledge and the infrastructure for a new kind of financial instrument that can price and hedge risk for retail investors and institutions alike.The National Hockey League’s Minnesota Wild warms up in front of a sign advertising the prediction market platform Kalshi in Chicago before a game against the Chicago Blackhawks, March 17, 2026. (David Banks/AP)

” data-large-file=”https://www.conservativenewsdaily.net/breaking-news/wp-content/uploads//2026/08/localimages/Fea.Unpredictable2.082626.jpg?w=696″ height=”658″ width=”1024″ “https:>The National Hockey League’s Minnesota Wild warms up in front of a sign advertising the prediction market platform Kalshi in Chicago before a game against the Chicago Blackhawks, March 17, 2026. (David Banks/AP)

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This isn’t marketing hyperbole. Certain markets are followed very closely by investors, revealing expectations on things such as inflation, payrolls, and Federal Reserve interest rate decisions. In February, the Fed published a working paper titled “Kalshi and the Rise of Macro Markets,” arguing that prediction markets constitute a valuable complement to existing forecast tools and describing Kalshi as “the most mature and comprehensive prediction market for economic forecasting.”

These platforms are also tied to politics. Donald Trump Jr. advises both of the leading markets, and the Trump administration has generally embraced them. But the previous administration could be outright hostile. In 2024, the Biden-era FBI raided the apartment of Polymarket founder Shayne Coplan while the CFTC repeatedly attempted to constrain its expansion into new markets. After Trump returned to office, the regulator voluntarily dismissed its appeal over political events contracts and abandoned a proposed rule that would have prohibited trading on political and sporting events. Kalshi began offering sporting events contracts in January 2025, a category that now accounts for up to 90% of its trading volume. Congress, meanwhile, has not yet made any attempt to regulate them independently.

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In November 2025, the ex-investment banker Mark Moran traded on a Kalshi market titled “Who will run for public office this year?”, a market in which he was listed as an outcome. He later announced a Senate run in Virginia, then traded on his own primary. In April, Kalshi suspended him for five years and fined him $6,229.30, while punishing two other candidates who had traded on their races in Texas and Minnesota. In a disciplinary filing, Kalshi wrote that Moran “qualified as a direct decision maker” for the contract and had “direct influence” over the outcome. Moran, who said he wanted to get caught, told me he plans to sue.

Moran demonstrated that, while a person can eventually be caught and disciplined for breaking Kalshi’s rules, the underlying market was vulnerable to manipulation. Barring the decision maker from trading is one thing, but what about traders with money riding on that outcome? It raises the question: Why are such pliable contracts allowed to trade as derivatives in the first place?

The regulators now seem to be wondering the same. In mid-August, mention markets, in which users are able to trade on whether a specific word or phrase will be spoken aloud during a given event, were removed from Kalshi’s exchange amid an active inquiry from the CFTC.

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While the insights derived from its markets might make Kalshi a valuable tool for investors, they seem to play a lesser role in the company’s overall business model. Beyond major election cycles, political markets are similarly marginal. The real driver of Kalshi’s impressive growth has been sporting events such as the World Cup.

In the 2018 case Murphy v. NCAA, the Supreme Court struck down the Professional and Amateur Sports Protection Act of 1992, which prohibited states from authorizing or licensing sports betting except in special grandfathered cases such as Nevada. The ruling did not, however, contemplate federally regulated exchanges trading on the same outcomes. In Justice Samuel Alito’s majority opinion, he summed it up: “Congress can regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own.”

Kalshi has always maintained that it is not a gambling entity, an opinion shared by the CFTC but widely rejected by the states. To the surprise of no one, the gambling industry is among Kalshi’s more vocal critics. DraftKings and FanDuel each represent about a third of the regulated sports betting market that emerged post-2018, with Fanatics and various casino brands splitting most of the remainder. Matt Kalish, the co-founder of DraftKings, believes that Kalshi’s early success is due to regulatory arbitrage, offering sports markets in 12 states where sportsbooks cannot operate, including Texas and California.

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Such criticisms have not prevented the sportsbooks from adopting the same model, however. Since December 2025, DraftKings has operated a CFTC-regulated prediction market of its own, with FanDuel following suit in a joint venture with CME Group.

Chris Colombo, a veteran bookmaker and the son of slain mob boss Joe Colombo, believes that sports prediction markets closely resemble his old line of work. In 2008, a federal judge sentenced him to a year and a day in prison after he pleaded guilty to running an illegal gambling ring in New York. “It’s gambling, plain and simple,” Colombo told me. “I don’t have a problem with it. But promoting it the way they do is unacceptable.”

This year, concerns about sovereignty and lost tax revenue have led to a number of state suits. Minnesota introduced legislation making it a felony to operate or create a prediction market, only for a federal judge to block enforcement days before it took effect. Nevada won an injunction barring Kalshi from sports, political, and entertainment contracts. After an investigator from the Nevada Gaming Control Board kept trading after it had been prohibited in-state, the board threatened Kalshi with $120,000 daily penalties for failing to implement a geofence by Aug. 12. The board has since argued that Kalshi missed the deadline and is pursuing its claim in state court. A similar geofencing deadline in Washington looms on Sept. 2.

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This pushback foreshadows a confrontation with major implications for the future of both Kalshi and the CFTC. Prediction market cases are pending in eight of the 13 federal appeals courts and could reach 10 by the end of the year. It seems only a matter of time before one of these reaches the Supreme Court, where a decisive ruling on CFTC preemption could either prove to be a serious problem or a godsend for Kalshi.

In April, the 3rd Circuit Court of Appeals ruled in favor of Kalshi and the CFTC after Kalshi sued New Jersey’s gambling regulator over a cease-and-desist order. The decision upheld that Kalshi’s sporting events contracts are “swaps” and are not subject to state oversight.

“The Supreme Court will have several cases to choose from,” said Daniel Wallach, a gaming attorney and lecturer at the University of Miami Law School. “It’s either going to be the New Jersey case right out of the gate, or the next federal appeals court decision which is in conflict with the 3rd Circuit’s ruling.”

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In a recent interview, Mansour brushed off the growing litigation against Kalshi, comparing it to the early days of Uber, when bitter incumbents used everything at their disposal to halt the disruptor. “Monopolies use the legal system to thwart competition,” said Bradley Tusk, who ran Uber’s regulatory campaigns during its early expansion and whose consulting firm also advises Kalshi. “Here, the state is the monopoly. They’re upset that they don’t derive the tax revenue from prediction markets and can’t tell them what to do.”

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Kalshi seems to be racing the clock to grow large enough, fast enough that tearing down the edifice becomes unthinkable. But to justify ever-higher valuations, prediction markets must deliver on their promise to become permanent. For now, this is not certain. With $40 billion on the line, Kalshi’s investors will either own the infrastructure of a revolutionary new asset class or a betting exchange of contested legality, a binary outcome in its own right.

(*) Full article: https://www.conservativenewsdaily.net/breaking-news/prediction-markets-experience-explosive-growth-but-also-new-legal-challenges/