HOW PREDICTION MARKETS EXPOSE GAPS IN FINANCIAL AND GAMBLING REGULATION

Prediction markets are attracting increasing attention from regulators around the world. These platforms, where participants trade contracts tied to future events, combine elements of financial markets, gambling, and blockchain technology. Their growth raises questions about how existing laws apply to hybrid products that operate across borders and serve both retail and institutional users.

Originally designed to aggregate collective expectations about future outcomes, prediction markets have in some cases outperformed traditional opinion polls and forecasts. At the same time, they highlight inconsistencies in the legal treatment of financial derivatives and betting products, particularly when automation and decentralisation are involved.

How prediction markets function

Users participate by buying and selling contracts that pay out if a specified event occurs. Contract prices reflect the probability that the market assigns to each outcome. Once the event resolves, settlements are executed automatically according to pre‑set rules.

Many platforms rely on smart contracts on blockchain, which automate settlement and distribution of winnings without a central intermediary. This structure ensures transparency, auditability, and resistance to manipulation. Users can trade outcomes tied to politics, economic indicators, sports results, or measurable real‑world events, generating live market forecasts that often respond faster than surveys or expert analysis.

Platform models and regulatory approaches

Prediction markets differ widely. Some are fully decentralised, crypto-based platforms using blockchain infrastructure and stablecoins. Others operate as web-based platforms, attempting to fit within existing regulatory frameworks.

Differences include the level of decentralisation, the type of underlying events, settlement methods, payment options, and user verification procedures. A few platforms comply with local regulations, while many operate from jurisdictions with looser rules, exploiting grey areas in the law.

Major players, including Kalshi, Coinbase, and Robinhood, are forming alliances to create federally supervised prediction markets in the United States, signalling growing mainstream adoption.

Classification: finance or gambling?

A central question is how prediction markets should be classified. Contracts tied to financial variables, such as asset prices or macroeconomic indicators, resemble derivatives. In the European Union, these contracts fall under MiFID II and MiFIR, which place strict controls on derivatives and prohibit binary options for retail investors.

Contracts based on non-financial events, such as elections or sports, are generally treated as gambling under national laws. Because EU regulation is not harmonised, member states apply different rules, often leaving platforms in legal grey areas.

This dual identity creates regulatory uncertainty: many platforms are neither clearly regulated as financial markets nor authorised as gambling operators, leading to friction with authorities.

United States: Polymarket’s regulated return and ongoing state tension

The U.S. regulatory landscape for prediction markets has shifted from uncertainty to structured oversight at the federal level. After withdrawing from the U.S. market in 2022, Polymarket re-entered in late 2025 following the acquisition of a CFTC‑licensed derivatives exchange and regulatory clearance to operate as a Designated Contract Market. Under this framework, trades are executed through approved intermediaries, and users must complete identity verification, replacing direct crypto wallet access.

Polymarket’s relaunch demonstrates that prediction markets can operate legally as derivatives under the Commodity Exchange Act when structured appropriately. It represents one of the first blockchain-based platforms to achieve formal federal recognition in the U.S. 

State-level legal uncertainty remains. Regulators in states such as Tennessee and Massachusetts continue to challenge platforms, arguing that event contracts constitute gambling. Recent court rulings and cease‑and‑desist orders illustrate persistent tension between federal recognition and state law. 

The practical outcome is mixed: federally lawful operation coexists with uneven state-level access. Users must navigate differing rules, and platform availability remains limited in some jurisdictions.

Europe’s fragmented approach

European regulators have taken a more cautious approach. France, Belgium, Poland, and Italy treat many prediction market services as unauthorised gambling, effectively banning access. Germany has left platforms in regulatory limbo, evaluating whether they qualify as gambling. 

The Markets in Crypto-Assets (MiCA) Regulation also affects crypto-based platforms. While it does not directly regulate prediction markets, MiCA’s licensing and market‑abuse rules shape how platforms can operate legally in the EU, influencing stablecoin use, payment flows, and investor safeguards.

Technical and market challenges

Prediction markets face operational as well as legal hurdles. Fragmented liquidity and inconsistent pricing across platforms can undermine the accuracy of predictions. Different venues listing the same event may produce divergent probabilities, which reduces informational reliability.

Market participation is also uneven: larger or more informed traders can dominate, creating asymmetries that limit the benefits of collective intelligence.

Mainstream adoption signals

Prediction markets are attracting attention from mainstream finance and technology companies. Integration into digital services, acceptance in regulated advertising networks, and institutional investment indicate growing legitimacy. Even as oversight intensifies, the platforms are moving beyond niche experimentation toward structured market offerings.

Conclusion

Prediction markets test the boundaries of existing laws for derivatives and gambling. In the United States, federal recognition through CFTC-licensed platforms like Polymarket coexists with ongoing state-level legal disputes. In Europe, fragmented national approaches and crypto regulation complicate compliance.

As these markets mature, regulators and courts will face a clear challenge: balancing innovation, consumer protection, and market integrity. How this balance is struck will set a precedent for the future of hybrid financial and gambling products.