Prediction markets, once niche and experimental, have drawn increased scrutiny as companies like Polymarket and Kalshi expand rapidly in the United States. The tension between financial investment and gambling is sharpening as regulators seek to address new risks. Jay Clayton, former chair of the Securities and Exchange Commission (SEC), addressed these concerns in a recent discussion at the New York Stock Exchange. Investors, policymakers, and entrepreneurs have all begun to reassess the value and oversight of these platforms, underlining the complex interplay between innovation, risk, and legal oversight. With the involvement of major financial institutions and rising valuations, commercial interest has reached unprecedented levels.
In previous coverage, prediction markets such as Polymarket and Kalshi were primarily associated with legal uncertainties and regulatory pushback, particularly regarding the distinction between derivatives trading and gambling. Earlier news highlighted CFTC enforcement actions and noted limited investor access due to restrictive frameworks. Recent developments point to increased acceptance by U.S. regulators, especially after Polymarket secured special licensing and the backing of large institutions like Intercontinental Exchange Inc., reflecting broader industry validation. However, debate continues over state versus federal authority, particularly for sports-related contracts.
Could Regulation Keep Pace with Prediction Market Growth?
Jay Clayton emphasized the importance of clear oversight as prediction markets gain traction. According to Clayton, the core question involves identifying whether these products align more closely with financial instruments or with gambling activities, each requiring different regulatory treatment. As prediction markets attract both traditional investors and gamblers, regulators must determine the appropriate classification and oversight.
Where Do Polymarket and Kalshi Stand in the US Legal Landscape?
Both Polymarket and Kalshi have faced regulatory hurdles navigating U.S. laws. Having previously been barred for offering unregistered contracts, Polymarket gained renewed access after an amended license from the Commodity Futures Trading Commission (CFTC). Kalshi, while operating legally under federal rules, still contends with state-level challenges, especially with sports event contracts. Ongoing court decisions underscore the unsettled nature of these platforms’ regulatory status. Clayton’s warnings echo through these issues:
“People look for regulatory relief by providing a close enough function to something that’s highly regulated, and then they can operate under less regulation… But you have to ask yourself, is it far enough away from a current function that’s finally regulated that it should be regulated differently?”
Are Institutional Backers Driving Mainstream Adoption?
With the NYSE’s parent, Intercontinental Exchange Inc. (ICE), planning to invest $2 billion in Polymarket and distribute market data worldwide, institutional interest in prediction markets has surged. Reports suggest Polymarket’s valuation could reach as high as $15 billion in upcoming funding rounds, and both companies’ founders have reached billionaire status. Such rapid growth could push regulatory agencies to accelerate clarity regarding their operational boundaries and investor protections. Clayton urges caution and assessment:
“In any new thing… you have to ask yourself: What function is this product performing?”
The uncertainty around the classification of prediction markets—whether as a derivative, a gamble, or a novel investment product—will likely persist as these companies expand. Financial institutions may view them as a new asset class, while some states may regulate them more strictly given their resemblance to gambling activities. For investors and industry participants, closer research into legal definitions and compliance is essential before participation. Monitoring regulatory statements and court decisions, as well as evolving CFTC and SEC guidance, will help market participants avoid legal pitfalls and understand risk exposures. Those engaging with products by Polymarket and Kalshi should carefully consider their own risk profiles and the applicable legal frameworks.
