Understanding the Recent Bans
Recently, Singapore and Thailand have taken steps to ban Polymarket, a popular prediction market platform, claiming it operates like a gambling site. On the surface, this assertion appears valid, especially given Polymarket’s inclusion of sports betting, which positions it as a competitor to traditional sportsbooks worldwide. However, this perspective overlooks the fundamental differences between prediction markets and conventional gambling.
The Value of Prediction Markets
Critics often concede that prediction markets can serve as valuable tools for hedging against uncertain events, such as elections or significant geopolitical developments. However, they argue that the outcomes of sporting events lack the same consequential weight. This distinction is crucial in understanding why prediction markets should not be lumped together with gambling platforms.
A Different Kind of Betting
New York-based crypto attorney Aaron Brogan presents a compelling argument against the notion that prediction markets are merely a Web3 iteration of gambling. He emphasizes the structural differences between licensed gambling products and platforms like Polymarket or Kalshi.
According to Brogan, traditional gambling operators take on one side of the bet, essentially wagering against their users. They set odds and earn profits based on the outcomes of those bets. In contrast, prediction markets function as neutral facilitators that match buyers and sellers without taking a position themselves. They generate revenue through transaction fees rather than betting against their users.
Changing Incentives and User Experience
Brogan highlights that this neutrality fundamentally transforms the incentives involved. Unlike casinos, which may ban skilled players to protect their profit margins, prediction markets do not penalize their top users. “Prediction markets aren’t gambling because they’re not structured to be,” Brogan asserts. “They’re tools for understanding, hedging, and creating public goods.”
Navigating Regulatory Landscapes
The legal landscape surrounding prediction markets is complex. In the United States, acquiring an online gambling license is a challenging process. This begs the question: why don’t established players like DraftKings or MGM pursue prediction markets within regulated states?
Brogan explains that the key distinction lies in regulatory frameworks. Prediction markets registered as Designated Contract Markets (DCMs) fall under federal jurisdiction via the Commodity Exchange Act, which supersedes state gambling laws. This means that if a prediction market is federally registered, states cannot impose their regulations upon it.
Kalshi’s Strategic Moves
Kalshi, a prominent player in the prediction market space, seems to be confident in its regulatory standing. The platform has actively sought registration with the Commodity Futures Trading Commission (CFTC) and has recently expanded its offerings to include betting markets for major events, such as the Super Bowl.
However, this confidence does not extend to all competitors. For instance, Polymarket is not registered in the U.S. and could face legal challenges from states that view its operations as facilitating illegal sports betting.
The Rise of New Entrants
While Polymarket and Kalshi are among the most recognized names in prediction markets, many new entrants are emerging in this evolving landscape. One such player is the crypto exchange Crypto.com, which has recently launched its own sports betting platform after filing for self-certification as a DCM with the CFTC.
Brogan notes that if the CFTC does not respond within 24 hours of a self-certification filing, the applicant can proceed as if it has received approval. Should these new platforms gain traction and the CFTC remain inactive, they could disrupt the traditional sportsbook industry, which is valued at $21 billion.
In conclusion, prediction markets represent a novel approach to forecasting and understanding events, distinct from traditional gambling. As more players enter the field, the potential for innovation and growth in this space is significant, challenging the status quo in the betting industry.
