The burgeoning U.S. prediction market sector is encountering significant headwinds, with growing backlash threatening to reshape its regulatory landscape by 2027. Odds currently favor a rise in Democratic influence in Congress next year, which could empower lawmakers already targeting firms such as Kalshi and Polymarket.

Congressional Scrutiny and Legislative Pushback

Rapid Growth Spurs Regulatory Concern

Prediction markets have experienced explosive growth, soaring from $1.2 billion in monthly activity in early 2025 to over $20 billion just a year later. This rapid expansion has attracted the attention of critics and legislators alike.

Users currently trade on diverse outcomes, ranging from presidential speech content to music album releases and sports pennant winners. However, many state officials and federal lawmakers view these popular sports wagers as crossing the line into regulated gambling.

Concerns Over Insider Trading and Sensitive Events

Critics argue that certain markets focused on government actions, war, and assassination are problematic. High-profile incidents, including phantom bettors seemingly knowing the timing of military assaults before they occurred, have fueled these concerns.

These incidents have served as the catalyst for over half a dozen critical pieces of legislation introduced in Congress. These bills, supported by members from both parties, aim to sharply limit perceived bad behavior within the sector.

Key Legislative Proposals Targeting the Sector

Several specific bills aim to restrict market activities:

  • Legislation from Senators Jeff Merkley (D-OR) and Representative Jamie Raskin (D-MD) seeks to ban a wide swath of event contracts, halting bets on elections, most government actions, sports, and military actions.
  • The Insider Trading in Prediction Markets Act, backed by Senators John Curtis (R-UT) and Todd Young (R-IN), would prohibit government employees and election officials from betting on matters they possess inside knowledge of. This was a direct response to suspicious wagers related to the war in Iran.
  • The Preventing Real-time Exploitation and Deceptive Insider Congressional Trading Act, introduced by two Senate Democrats, bans trades by individuals who have prior awareness of outcomes involving government action, war, terrorism, or assassination.
  • A bill from Senators Adam Schiff (D-CA) and John Curtis (R-UT) aims to stop prediction markets from engaging in activities resembling sports betting, aligning with state gambling regulators' efforts.
  • Senators Richard Blumenthal (D-CT) and Andy Kim (D-NJ) introduced legislation focusing on preventing market manipulation and insider trading, while also banning trades on death, war, and military action, and demanding age verification.

The Battle for Jurisdiction: States vs. CFTC

State Lawsuits Challenge Federal Authority

While Congress debates legislation, state regulators are actively challenging the operational rights of prediction platforms in court. CEO Tarek Mansour's Kalshi is currently the target of numerous state lawsuits contesting its right to offer sports contracts outside state gambling regulations.

State regulators argue that event contracts functionally identical to wagers on state-regulated sportsbooks, like those on BetMGM, should be treated as gambling. A court in Nevada has already halted Kalshi's operations based on this argument.

The Gambling Is Not Investing Coalition

The pushback includes the formation of the Gambling Is Not Investing Coalition, which counters the industry’s claim that they should be regulated under federal derivatives rules. The coalition asserts, "If it looks like gambling and functions like gambling, it should follow gambling rules."

Kalshi's head of communication, Elisabeth Diana, countered these claims, stating the company is a "regulated, nationwide exchange for real-world events, and it is subject to exclusive federal jurisdiction."

CFTC Support for Prediction Markets

Commodity Futures Trading Commission (CFTC) Chairman Mike Selig has publicly championed the regulation of prediction markets under the CFTC’s purview, siding with Kalshi against state encroachment. Selig stated that state attempts to regulate represent a "power grab ignores the law and decades of precedent."

The CFTC has been developing new regulations, including clarifying that trading based on stolen information or by individuals who can influence outcomes is prohibited. This follows incidents where Polymarket suspended and fined users for betting on events they potentially influenced.

Potential Presidential Veto and Future Outlook

The Trump Factor

Even if legislation passes both chambers of Congress, it would face President Donald Trump's desk. The Trump family has ties to the industry; Don Jr. serves in advisory roles for both Kalshi and Polymarket, and a firm he is involved with has a stake in Myriad, which uses USD1 as a settlement asset.

Furthermore, President Trump has reportedly praised prediction markets for superior election forecasting compared to traditional polls. Given his administration's focus on elevating the crypto industry—which shares technological DNA with these platforms—the White House may act to resist congressional action.

The Path Ahead

Legal experts suggest that the ultimate test of jurisdiction between state and federal authorities will likely reach the Supreme Court within two years, creating a regulatory "minefield" in the interim. While some pending bills may fail to advance, the overall political tide suggests a challenging environment ahead for the sector.