Guest Column: Prediction Markets May Be 'Gambling,' But Does The Definition Miss The Point?
Prediction markets news: CFTC roundtable update (or lack thereof); Kalshi-Maryland lawsuit teleconference
Editor’s note: I am not the only “source of truth” in the prediction markets industry. In that light, I am going to include some commentary below with which I don’t agree 100%. But I think it’s important as we all learn more about prediction markets and what their future in the United States might be that we consider other viewpoints.
But first, a few updates on the news front:
As of the time this newsletter was published, the Commodity Futures Trading Commission had still not publicly announced the roundtable for prediction markets that has been scheduled for April 30. I had heard indications that it would be announced today — and it still could be! But as of now, folks who are supposed to be a part of the roundtable are still working under the belief it will take place on April 30. Yes, that’s just one week away.
A teleconference happened in federal court this morning in the lawsuit Kalshi brought against Maryland officials. Kalshi wants the court to stop Maryland from shutting down Kalshi’s operations in the state; regulators claim Kalshi is offering illegal sports betting. More from attorney Dan Wallach here. The TL; DR version is that Maryland is not enforcing the cease-and-desist order while the court considers Kalshi’s request for a preliminary injunction.
Onto the guest post!
Aaron Brogan is the founder and managing attorney of Brogan Law, an elite boutique law firm focused on cryptocurrency and novel financial products. Aaron is an expert on the regulation of cryptocurrency and prediction markets in the United States, and is frequently published and cited in that capacity in publications like CoinDesk. Before launching Brogan Law in 2024, Aaron was an attorney with the same focus at the international law firms McDermott Will and Emery and Weil, Gotshal and Manges. His substack, the Brogan Law Newsletter, is a widely read and highly respected resource in the industry; follow him there to receive weekly updates on these topics.
Dustin covered Kalshi CEO Tarek Mansour’s comments to Axios arguing that event contracts are not “gambling” last week.
"I just don't really know what this has to do with gambling," he said at an office in Washington. "If we are gambling, then I think you're basically calling the entire financial market gambling."
Obviously, Mr. Mansour is being obtuse. He, you, and I all know what gambling is and know that when a user purchases an event contract on Kalshi, that is exactly what they are doing.
Dustin argued as much in his piece:
This is all a bit of a straw man. I think we all understand that every decision we make in life comes with some amount of risk, either large or minuscule. That does not inherently make everything we do “gambling.” Gambling generally implies betting on something that is out of our control. Most of the decisions we make that have risk, we also have some measure of control over them.
Before I continue, I should say that I am biased. I represent prediction markets. I believe in prediction markets. And so I am not an impartial arbiter. As an attorney, people have been asking me this question for years. Well, I’m sick of it. It’s time to put this conversation to rest. Yes, all of this is gambling, but that definition misses the point. Let me explain.
Since the demise of the Professional and Amateur Sports Protection Act in Murphy v. NCAA, the definition of gambling has been left to the states, and generally, it is quite similar. New Jersey, for example, defines it like this:
Staking or risking something of value upon the outcome of a contest of chance or a future contingent event not under the actor's control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome.
You’ll notice first (i) that this definition is quite broad, and second (ii) that it definitely, without a shadow of a doubt, covers every single event contract, sports or no. Indeed, returning to point (i), it covers much more than just event contracts. Virtually any derivative or insurance contract is equally “gambling” by this definition.
This is not a flaw of the definition, but it is not legally meaningful because we recognize that these other types of contracts, grain futures, insurance, and, yes, event contracts, are socially valuable and so they are regulated under different regimes.
And the same logic applies in the other direction as well. Why aren’t state gambling contracts just unregistered, federally regulated derivatives? Consider the CFTC’s definition of “binary option”:
A binary option is a type of options contract in which the payout will depend entirely on the outcome of a yes/no proposition… When the binary option expires, the option holder will receive either a pre-determined amount of cash or nothing at all.
Just as clearly as state-law “gambling” would apply to Kalshi’s event contracts, so too could the Commodity Exchange Act (CEA) apply to DraftKings or FanDuel. Kalshi has Section 2(a)(1)(A) of the CEA and the supremacy clause of the Constitution on its side. DK/FD have, well, convention and detente. There is little question that if the CFTC chose to regulate them, they could. They just haven’t done it yet.
The United States has the capacity to regulate this type of contract on a state or federal level, and by successfully registering as a DCM, Kalshi finds itself within the federal regime and outside of the state regimes.
The qualitative distinction between prediction markets and state-regulated betting, then, is not that one or the other is gambling, it is that the regulatory treatment of one is markedly better for users than the other. This is the lens that matters, and this is the criteria that those on the fence about this new technology should consider.
Here’s the truth. People have a fundamental desire to wager on the outcome of events. This may be hubris, entertainment, or opportunism for the intelligent or knowledgeable. I don’t know why, and it doesn’t matter. For whatever reason, these markets are inherent to human society and will arise independently anywhere that currency and contingent events meet.
A second hard truth: These markets lead many to ruin. There is a squishy dark spot deep in the recesses of the human mind that triggers reinforcing dopamine in response to uncertainty. I’m not making this up, it is science. You might have experienced it if you’ve ever felt yourself glued to your phone waiting to hear from a school, job offer or lover — or played golf. Some people exposed to these conditions react compulsively and destroy themselves.
Even more broadly, there is a gradient of sophistication and knowledge in human populations, and, where we are allowed to gather and wager against each other freely, the strong end up extracting money from the weak. This isn’t fair and it isn’t good, but it is the fundamental dynamic of sports betting, day trading, and it will be of prediction markets too. No way around it.
These qualities, combined with a tendency to attract cheats and gambling's natural association with dissipation and waste, have historically made the practice unseemly, so interlopers have often tried to marginalize and ban it. But this doesn’t work. Markets are not constructed, they are inherent. Bans on betting only create unregulated black and gray markets.
This is probably part of the reason that gambling laws have liberalised in the United States in recent years — people recognize that prohibition can cause more harm than good. After all, the problem gambler may lose his house in either a regulated or unregulated betting market. But at least in the regulated market, he will keep his teeth.
Some people have also noticed that markets have some good qualities, too. For one, they are natural hedging vehicles. Have a business with lots of exposure to the price of chicken? Well, you can hire Ray Dalio to build you synthetic corn-soy futures, as McDonald’s did in the 1980s, but it is probably easier to purchase a large contract betting that the price of chicken will go up. These types of contracts are the whole basis of the insurance industry, and as long as people have concave utility functions, they will continue to add massive value to society.
Markets are also incredibly efficient tools for price discovery, by incentivizing participants to aggregate their knowledge, a price represents the synthesis of all of that knowledge. This, Justin Wolfers and Eric Zitzewitz remarked in their 2003 paper “Prediction Markets”, might make them a powerful tool for predicting events. This suggestion was borne out in 2024, when Polymarket correctly predicted Donald Trump’s election in face of traditional polling aggregates showing a coin flip.
A clear-eyed perspective takes both the downsides and benefits of these markets together. If this is “gambling”, then that is no invective.
Murphy v. NCAA made progress, but we should not stop there. Prediction markets’ ascendance is an inflection point in the regulation of risk assets. The CFTC will have an opportunity to choose, or at least influence, whether popular betting markets remain regulated by the states or come under the federal umbrella. In making that choice, the natural question is which structure will maximize the benefits, hedging and price discovery, while minimizing the harms, predation and compulsive behaviour.
From that perspective, I think it is obvious that the federally regulated markets are better. State regimes have mostly flowed from pre-existing casino regulation, typically favoring the house. That is why sports books are permitted to limit bet sizes of any “sharp” bettor while giving their losers exorbitant perks to keep betting. This practice maximizes the damaging aspects of these markets, while simultaneously removing the most sophisticated participants, thereby kneecapping price discovery. Extractive behaviour flows naturally from sports books' posture as their customers’ counterparty. They can only make money as long as they are taking it from users, so as long as they operate their incentive will be to keep winners out and losers in, toeing the line of ethics till eternity.
Prediction markets do not have this problem. They are simple intermediaries where bids and asks can meet, and from that process, a signal may emerge. This is the point Mr. Mansour tried to make in his Axios interview, but if you can’t first admit that these products are close substitutes, then the principled arguments melt into noise. Prediction markets are like gambling, just better. It is simply an artifact of history that state-regulated sports books came first, and so have an incumbency advantage. Kalshi may not have always covered itself with glory, but anyone considering these markets from first principles would prefer the federal markets to the state.
The sooner we drop the moralism and admit that it's all just betting, the better.
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