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As prediction markets continue to expand their offerings in the U.S. and rack up legal victories that prevent enforcement actions by state gaming regulators, licensed sports-betting operators remain stuck in limbo.
In addition to sweepstakes operations, the growth of prediction markets was among the dominant topics at last week's SBC Summit Americas in Florida, where gaming industry leaders struggled to arrive at any consensus on the impact of the markets or their legality.
“Right now, Kalshi’s winning,” said Melissa Blau, CEO of advisory firm iGaming Capital. “As my clients watch this, they can’t do anything and it’s frustrating.
“They’re not allowed to do it, but they have to watch everyone else be able to do it and just sit idly by and watch their addressable market shrink and shrink.”
Gaming attorney Dan Wallach said that the legal terrain is still too dicey for most regulated gaming operators to enter the space, as the state regulators that oversee their licensed businesses continue to push back against Kalshi and other prediction markets offering trades on sporting events.
“While all these court cases are playing out, there's a legal cloud over everything,” Wallach said. “And one thing that licensed gaming companies never want to run into is a problem of having their activity declared in violation of the law."
Even if regulators do ultimately warm to the concept of sports prediction markets, the process of becoming an exchange could also be a complicated one for operators to pursue.
“It takes two years-plus these days to get one,” David Aron, counsel for law firm Jones Day, said of the process to become an exchange platform approved by the federal government's Commodity Futures Trading Commission (CFTC).
“They used to only take like a year, but the CFTC process [alone] takes like a year. Or you can buy your way in, if you could buy an existing one, and some people are trying to do that,” Aron told SBC Summit delegates.
Blau added that another option for operators is to utilize a white-label offering from Kalshi or another CFTC-approved exchange, similar to how financial trading platform Robinhood has already partnered with Kalshi to offer sports-event contracts.
“The caveat is they have to share the customer,” she said. “So long as they're willing to share the customer, then they can tap into their liquidity and act as an affiliate.”
In addition, Wallach said that the efforts of major sports-betting operators such as DraftKings and FanDuel to reach agreements with Indian gaming tribes over a potential model for legal sports wagering in California also add a layer of complexity to the situation.
“They have to tread very carefully here and not sort of undermine the delicacy of those ongoing negotiations,” he said.
Wallach has been skeptical of the legality of the prediction markets based on sporting events, arguing that there is no congressional authorization for such contracts.
He also criticized Kalshi for changing its argument over time, initially arguing that sports contracts were not permitted during a successful lawsuit challenging the CFTC’s rejection of Kalshi’s efforts to offer contracts on political elections, before then changing its tune this year upon launching sports contracts.
“Less than nine months later, they shifted 180 degrees and are denying all of those things and calling these event contracts financial instruments between traders, while at the same time taking the position in the promotional materials that this is betting or wagering, legal sports betting in all 50 states,” he said. “They can’t have it both ways.”
Wallach offered a lengthy legal argument, but Blau countered with a simple, more practical question.
“Does it even matter?” she asked. “Donald Trump Jr. is an advisor for Kalshi. This academic fight, this argument, I hear you, but does it matter?”
Blau said that even other federal regulators, such as the National Indian Gaming Commission (NIGC), were advising at least one of her clients that there was little that the federal oversight body for tribal gaming could do to stem the tide.
“Even the NIGC came to one of my clients a few months ago and said, 'Listen, we can't help you, we lost this fight, the train is leaving the station,'” she said.
“This particular CEO is really upset on this occasion, because he felt that I've sat this out, I've taken the punches, I've abided by the rules, and I'm not going to do it this time, so he started to pursue alternatives."
Alex Kane, CEO of Sporttrade, which offers a licensed betting exchange product in five states, argued that the impact on the regulated sports-betting industry will not be as severe as many fear.
“I think to call what DraftKings currently offers and what Kalshi, or Crypto.com or Sporttrade offers as both sports betting, it’s intellectually inadequate,” Kane said.
"[Larger sports-betting operators] know that they make 85 to 90 percent of their free cash flow from parlays and same-game parlays and the types of things that aren't even close to what's being offered on these prediction markets,” Kane added.
“From a state tax revenue perspective, we’re going to see over the next year, it’s not going to have any impact, because the same-game parlay, the juicy stuff, the casino, that’s not happening on the prediction markets, in my opinion.”
Even if exchanges begin to expand their offering to include parlays, Kane said that the model is limited in how effective it can be compared to the choices and pricing offered by traditional sportsbooks, particularly for the type of parlay that would be spotlighted on a platform.
“[Sportsbooks] are offering it, and they know they’re doing it at a 15 percent margin, and that’s great, and that’s awesome, and I think that should continue to exist,” he said. “That would never happen on an exchange.”
“If an exchange promotes one big, juicy parlay, one market maker offers it at a 15 percent edge, and then I come in and say, 'That’s a great deal, I’ll offer it at 13 percent edge', and then the next market-maker comes in and we grind each other down to where the hold is sub-one-tenth of a percent.”
Sporttrade said in a letter to the CFTC last month that it plans to ask the regulator for “no-action” relief to begin offering limited prediction markets across the United States on an interim basis while pursuing a full exchange approval. The company is licensed as a sports-betting operator in New Jersey, Colorado, Arizona, Iowa and Virginia.
