Prediction markets: Rise, risks, regulation, and interest in India
Prediction markets like Polymarket and Kalshi allow betting on real-world events.
Photo by Satyajeet Mazumdar
More than 20 federal lawsuits have been filed in the US against prediction markets like Kalshi and Polymarket, arguing they are essentially gambling platforms misclassified as financial exchanges. These platforms allow users to trade on the outcomes of various events, from sports and elections to award shows, with over $1 billion traded on Kalshi alone during Super Bowl Sunday. Bloomberg reported Kalshi's January trading volume reached nearly $10 billion, mostly tied to sports.
The lawsuits dispute whether these companies should be regulated by the Commodity Futures Trading Commission (CFTC), as they claim, or by state gaming regulators. State attorneys general and tribal regulators have issued cease-and-desist letters and filed lawsuits, alleging the platforms operate as unlicensed sports wagering that avoids state gambling laws and taxes. New York's gaming commission ordered Kalshi to stop operating sports-related contracts, leading to a lawsuit by Kalshi challenging state authority.
Amid the legal battles, the CFTC's new chair, Michael Selig, has signaled support for the "responsible development" of event contracts and has withdrawn proposals that would have limited political and sports event offerings. The CFTC also filed a friend-of-the-court brief defending its jurisdiction over these markets. However, 23 Democratic US senators wrote to the CFTC asking it to stay out of the state legal battles and to bar gaming contracts. Some state lawmakers are advancing bills to target these platforms, including measures in Connecticut, Illinois, and Hawaii.
The rise of prediction markets and the ensuing regulatory conflict are relevant to India as they highlight the challenges of regulating emerging financial technologies and balancing innovation with consumer protection. This is pertinent for UPSC exams, particularly GS Paper III (Economy) and GS Paper II (Polity and Governance), as it touches upon issues of financial regulation, state-federal relations, and the regulation of online gambling.
Key Facts
Prediction markets are platforms where users bet on the outcomes of real-world events.
Platforms like Kalshi and Polymarket are popular prediction market platforms.
Users can bet on events including wars, elections, the Oscars, and even the weather.
Prediction markets are criticized for promoting irresponsible gambling and the spread of false news.
Prediction markets are regulated in some jurisdictions but banned in others.
Multiple Reddit users in India have created threads to ask whether betting via platforms such as Polymarket is legal in India.
UPSC Exam Angles
GS Paper III (Economy): Regulation of financial markets, role of regulatory bodies
GS Paper II (Polity and Governance): Federal-state relations, regulatory jurisdiction
Potential questions on the role of CFTC, challenges in regulating emerging technologies
In Simple Words
Prediction markets are like betting pools where people guess what will happen in the world. You can bet on anything, like who will win an election or if a war will start. If you guess right, you win money.
India Angle
In India, people are curious about whether these betting platforms are legal. Some Indians are exploring ways to make money from them without getting into trouble with the law.
For Instance
Imagine your local cricket club holding a contest to predict the score of the next India-Pakistan match. People pay to enter their predictions, and the closest guesses win the prize money. Prediction markets work similarly, but on a much larger scale.
Prediction markets can influence public opinion and even spread misinformation. It's important to understand how they work and what their potential impacts are.
Prediction markets: Where bets meet reality, with potential for profit and peril.
Prediction markets are platforms where users bet on the outcomes of real-world events, including wars, elections, and even the weather. Platforms like Kalshi and Polymarket allow users to buy units of a 'probable event' to make a profit when that event happens. These markets are surging in popularity due to their design, ease, and social media virality.
However, they face criticism for promoting irresponsible gambling, encouraging bets on violence, spreading false news, and potential insider trading. While regulated in some jurisdictions, they are banned in others. Prediction markets are also sparking interest in India, with users exploring their legality and potential for profit.
Expert Analysis
To fully understand the news surrounding prediction markets, several key concepts need to be addressed.
First, the Commodity Futures Trading Commission (CFTC), is an independent agency of the U.S. government created in 1974 that regulates commodity futures and option markets. The CFTC's role is central to the debate, as prediction markets like Kalshi and Polymarket claim to operate under its jurisdiction as "event derivatives." The CFTC's new chair, Michael Selig, has signaled support for the "responsible development" of event contracts and has defended the agency's exclusive jurisdiction over these markets, leading to conflicts with state regulators who view these platforms as gambling operations.
Second, the concept of event contracts is crucial. These are financial contracts whose value is derived from the occurrence (or non-occurrence) of a specific event. In the context of prediction markets, users buy and sell contracts based on their predictions of future events, such as election outcomes or sports results. These contracts are at the heart of the regulatory debate, as states argue that sports-related event contracts are essentially sports betting and should be regulated as such, while the CFTC views them as legitimate financial instruments.
Third, the Commodity Exchange Act (CEA), is a United States federal law that regulates commodity futures and options markets. The CEA grants the CFTC the authority to regulate these markets, including event contracts. However, the Act also includes provisions that allow the CFTC to prohibit event contracts that involve "gaming" or that are deemed contrary to the public interest. The interpretation of the term "gaming" is a key point of contention, as it determines whether prediction markets fall under federal or state regulation.
For UPSC aspirants, understanding these concepts is essential for both prelims and mains. In prelims, questions may focus on the roles and responsibilities of the CFTC, the definition of event contracts, and the provisions of the Commodity Exchange Act. In mains, questions may explore the challenges of regulating emerging financial technologies, the balance between innovation and consumer protection, and the implications of federal-state conflicts over regulatory jurisdiction. The case of prediction markets provides a concrete example of these broader issues.
Visual Insights
Key Developments in Prediction Markets
Highlights of recent regulatory and market activities related to prediction markets.
- CFTC Chairman's Stance (Jan 2026)
- Supports responsible development
- Senators' Letter to CFTC (Feb 2026)
- 23 Democratic Senators
Indicates a shift towards a more permissive approach to event contract markets.
Urging CFTC to bar gaming contracts and those involving war, terrorism, etc.
More Information
Background
Latest Developments
In January 2026, SEC Chairman Paul Atkins and CFTC Chairman Michael Selig held a joint “Project Crypto” summit to modernize the regulatory framework for cryptoassets. During this summit, Chairman Selig announced his plans to "support the responsible development of event contract markets," signaling a shift in the CFTC's approach to prediction markets.
This shift includes withdrawing a 2024 proposed rule that would have prohibited political and sports-related event contracts, as well as a 2025 staff advisory regarding sports-related event contracts. These actions indicate a willingness by the CFTC to litigate the position that event contracts, including sports-related ones, fall exclusively within its jurisdiction. However, this stance is being challenged by state gaming regulators and some members of Congress, who argue that prediction markets should be subject to state gambling laws.
Looking ahead, the CFTC is preparing new rulemaking on event contracts with the goal of establishing clear, workable standards. This rulemaking is expected to draw industry participation and judicial scrutiny, as stakeholders continue to debate the appropriate regulatory framework for prediction markets. The outcome of these legal and regulatory battles will likely shape the future of prediction markets in the United States and potentially influence regulatory approaches in other countries, including India.
Frequently Asked Questions
1. Why are prediction markets facing legal challenges NOW, given they've existed for a while?
The recent surge in popularity and trading volume of platforms like Kalshi and Polymarket, especially related to sensitive topics like sports and politics, has attracted increased scrutiny. This heightened visibility, coupled with concerns about irresponsible gambling and the spread of misinformation, has prompted regulatory bodies and state attorneys general to take action.
2. How could the rise of prediction markets potentially affect the Indian stock market or economy?
While prediction markets are currently more prominent in the US, their increasing popularity could have implications for India. If prediction markets gain traction in India, they could: * Provide real-time insights: Offer a new source of real-time data on public sentiment and expectations regarding economic events, policy changes, and even election outcomes. * Attract speculative investment: Draw in speculative investment, potentially diverting funds from traditional asset classes. * Raise regulatory challenges: Pose regulatory challenges related to gambling, market manipulation, and consumer protection.
- •Provide real-time insights: Offer a new source of real-time data on public sentiment and expectations regarding economic events, policy changes, and even election outcomes.
- •Attract speculative investment: Draw in speculative investment, potentially diverting funds from traditional asset classes.
- •Raise regulatory challenges: Pose regulatory challenges related to gambling, market manipulation, and consumer protection.
3. What's the key difference between prediction markets and traditional stock exchanges?
Traditional stock exchanges involve trading ownership in companies (stocks) or commodities. Prediction markets, on the other hand, involve trading contracts based on the *outcomes* of future events. Instead of investing in a company, you're betting on whether a specific event will occur.
4. If UPSC asked about prediction markets, what specific fact from this news would be a good 'trap' option in a Prelims MCQ?
A likely trap would be related to the countries where Polymarket is restricted. The question might state that Polymarket is restricted in 'China and Russia,' when the article specifies the U.S., Germany, the U.K., and Singapore are among the 33 restricted countries. Examiners often test knowledge of specific countries involved in international events.
Exam Tip
When a question lists countries, double-check if ALL the listed countries are actually involved as stated in the news. UPSC often uses this to create incorrect options.
5. How does the CFTC's evolving stance on prediction markets reflect broader trends in crypto regulation?
The CFTC's initial reluctance, followed by a more supportive stance signaled by Chairman Selig's announcement to "support the responsible development of event contract markets," mirrors the broader struggle to regulate cryptoassets. The "Project Crypto" summit indicates a move towards modernizing the regulatory framework, suggesting a willingness to accommodate innovative financial products while still addressing potential risks. This reflects a global trend of regulators trying to strike a balance between fostering innovation and protecting investors.
6. In a Mains answer, how would I 'critically examine' the potential benefits and risks of prediction markets?
To critically examine prediction markets, structure your answer around these points: * Benefits: Highlight their potential for accurate forecasting, real-time insights into public sentiment, and potential for hedging risk. * Risks: Discuss concerns about promoting gambling, the spread of misinformation, and potential for market manipulation. * Regulation: Analyze the challenges of regulating these markets, balancing innovation with consumer protection. * India's context: Briefly touch upon the potential implications for India, considering its regulatory environment and investor behavior.
- •Benefits: Highlight their potential for accurate forecasting, real-time insights into public sentiment, and potential for hedging risk.
- •Risks: Discuss concerns about promoting gambling, the spread of misinformation, and potential for market manipulation.
- •Regulation: Analyze the challenges of regulating these markets, balancing innovation with consumer protection.
- •India's context: Briefly touch upon the potential implications for India, considering its regulatory environment and investor behavior.
Exam Tip
In 'critically examine' questions, always present BOTH sides of the argument with evidence, and then offer a balanced conclusion.
Practice Questions (MCQs)
1. Consider the following statements regarding the Commodity Futures Trading Commission (CFTC) in the United States: 1. The CFTC was established in 1974 to regulate commodity futures and option markets. 2. The CFTC's jurisdiction extends to event contracts, including those related to sports and political outcomes. 3. The CFTC's current chair, Michael Selig, supports limiting the development of event contract markets. Which of the statements given above is/are correct?
- A.1 and 2 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
Show Answer
Answer: A
Statement 1 is CORRECT: The CFTC was established in 1974 to regulate commodity futures and option markets. Statement 2 is CORRECT: The CFTC's jurisdiction extends to event contracts, including those related to sports and political outcomes. Statement 3 is INCORRECT: Michael Selig, the current chair of the CFTC, supports the responsible development of event contract markets, not limiting their development.
2. In the context of prediction markets, which of the following best describes an 'event contract'?
- A.A contract to buy or sell a commodity at a future date
- B.A financial contract whose value is derived from the occurrence or non-occurrence of a specific event
- C.A type of insurance policy that pays out in the event of a specific occurrence
- D.A contract between a sports team and a player
Show Answer
Answer: B
An event contract is a financial contract whose value is derived from the occurrence (or non-occurrence) of a specific event. In prediction markets, users buy and sell these contracts based on their predictions of future events.
3. Which of the following statements is NOT a concern regarding prediction markets?
- A.Potential for insider trading
- B.Risk of compulsive gambling
- C.Lack of regulatory oversight
- D.Guaranteed high returns for investors
Show Answer
Answer: D
Concerns regarding prediction markets include the potential for insider trading, the risk of compulsive gambling, and the lack of regulatory oversight. Guaranteed high returns for investors is NOT a concern, as prediction markets, like any form of betting or investment, carry risk and do not guarantee returns.
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Source Articles
The explosive rise and inherent risks of prediction markets | Explained - The Hindu
Trump administration backs Kalshi, Polymarket as states move to ban prediction markets - The Hindu
Redouble efforts to reduce disaster risks - The Hindu
The rise and risks of health insurance in India - The Hindu
Taking risks - The Hindu
About the Author
Ritu SinghEngineer & Current Affairs Analyst
Ritu Singh writes about Economy at GKSolver, breaking down complex developments into clear, exam-relevant analysis.
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