Five highlights from Brookings’ prediction market events

The odds you see a prediction market advertisement keep rising as trading volumes boom. On these platforms, which blur the line between finance and gambling, users trade on the outcome of real-world events—sports games, elections, military strikes, or the price of Costco hotdogs. This speculative frenzy raises legal, economic, ethical, and national security concerns about how these markets should be regulated and the fundamental purpose of financial markets.

To analyze these issues, Brookings held two public events with a diverse set of experts, including Senator Adam Schiff (D-CA) and Senator Jeff Merkley (D-OR), former Commodity Futures Trading Commission (CFTC) Commissioner Christy Goldsmith Romero, Kalshi General Counsel Rick Heaslip, tribal and gaming expert Patrice Kunesh, and scholars Sam Henry Lazarus, Jonathan Cohen, and Todd Phillips. Below is a roundup of the top five issues we explored. You can watch both events in full here and here.

1. Are prediction markets financial products or gambling?

Prediction markets allow users to trade “swaps,” a type of financial contract tied to a binary outcome. A swap on whether the New York Knicks win the NBA Finals settles at $1 if they win and $0 if they lose. Buying it at 50¢ is equivalent to an even-odds bet that the Knicks win. Odds, reflected by price, swing as users buy and sell.

To be considered a swap, the law requires an economic consequence. Whether an event contract has one—and thus qualifies as a swap subject to legal protection and regulation by the CFTC—is core to whether prediction markets are financial instruments or gambling products.

Senator Merkley argued the platforms let people “bet on anything anywhere,” from “the color of the President’s tie” to “whether or not an individual is going to attend the Super Bowl.” This runs contrary to the CFTC’s purpose of helping people “lock in prices to buy and sell for economic certainty,” he said. The platforms had instead become “a massive gambling operation.”

Former CFTC Commissioner Goldsmith Romero urged a return to first principles—”What is a swap?”—citing a market on the color of the Gatorade poured on a winning Super Bowl coach as dubious. Todd Phillips of Georgia State University pointed to “mention markets,” where users bet on whether a phrase, such as “what a catch,” will be uttered by sports commentators. He argued, “there is no hedging utility from that, none whatsoever.”

Kalshi General Counsel Rick Heaslip took the opposite view, pointing to the social media clipping economy. “[There are] companies that are built around individual plays and showing them to users on Twitter and Instagram.” Considering such contracts swaps may run contrary to intuition, but he said that underscores the breadth of the economic consequence threshold.

Where to draw the line, Goldsmith Romero countered, is ultimately “up to the CFTC.” Regarding the examples of swaps raised by her fellow panelists, she asked: “Does that really sound like you’re hedging something? What are you hedging? [. . .] And so I do think there needs to be this line that’s drawn” where hedging for a financial transaction is acceptable.

2. Impact on states and tribes, who have long regulated gaming

Gambling, such as casino games and lotteries, has long been regulated at the state level. Once confined to a handful of states, legal gaming has spread to 46 states and Washington, D.C. Online sports betting took off in 2018 after the Supreme Court overturned the Professional and Amateur Sports Protection Act that functionally confined sports betting to Nevada, with limited exceptions for a handful of other states. Since then, 39 states have legalized some form of sports betting, though several of the largest—California, Texas, and Georgia—still prohibit it.

Prediction markets circumvent those prohibitions—as well as state and tribal licensing, taxation, and rulemaking regimes—by listing event contracts that mirror popular sportsbook offerings. The pool of potential bettors expands to both states that prohibit sports gaming and younger Americans as the age to trade swaps is 18, while in some states the gambling age is 21.

Senator Merkley said “states should have this right to make public policy around this issue.” Senator Schiff said the markets “seem to violate state sovereignty… and a state’s ability to decide whether extensive gaming is in the public interest or isn’t.”

The financial stakes are massive. Legal gaming generated $71.9 billion in revenue in 2024, paying $16 billion in gaming taxes to state and local governments, with tribal operations core to those governments’ ability to function. Patrice Kunesh did not mince words: “Indian gaming saw $44 billion in revenue [in fiscal year 2024], and most of all that goes back into funding essential services. Gaming has actually transformed lives: Native people are healthier, they’re attaining higher levels of education, they’ve reduced smoking and diabetes and are more civically engaged. Prediction markets, especially sports event contracts, present an existential threat, a seismic impact, to Indian tribes.”

This looming financial challenge has spurred numerous lawsuits from states and tribes against prediction markets. Referencing the legal dispute, Senator Schiff expressed disapproval of how CFTC Chair Selig has taken a stance: “I asked him whether he would let the courts resolve this issue, and he said that he would. [. . .] Well, he’s done the exact opposite, which I find very duplicitous. [. . .] He’s leading the CFTC down this path to fully embrace prediction markets.” Legal experts expect the Supreme Court to eventually weigh in.

3. Threats: Offshore markets and insider trading

A third flashpoint was insider trading and national-security risks posed by foreign (offshore) exchanges. Panelists agreed troubling behavior occurs on venues outside CFTC oversight—chief among them Polymarket’s Panama-based operation. Offshore exchanges can list contracts U.S. law forbids, such as wagers on war, terrorism, and assassination. These contracts may invite malign actors to act in the real world to resolve those events in their favor or let insiders trade on classified knowledge.

Earlier this year, a U.S. soldier was charged with using classified information to profit from Polymarket bets on the capture of Venezuela’s Nicolás Maduro, and a cluster of military-linked accounts made more than $2.4 million on wagers tied to the war with Iran.

Sam Lazarus, a researcher at the Council on Foreign Relations, argued, “Polymarket, with its current listings and certainly with a number of its historical listings, does pose a risk to national security.” On the Maduro case in particular, he stressed: “Insider trading on something like the Maduro raid—sure it’s distasteful and it’s greedy and somebody’s being ripped off [. . . but] the real crime is the leakage of that information on the order book, when the trade is placed.”

The CFTC cannot dictate what an offshore exchange lists but could do more to keep Americans off those venues. Todd Phillips argued: “One of the biggest problems is it’s fairly easy for Americans to get on these unregulated exchanges.”

Insider trading seems to be happening at home. In February, former congressman George Santos promised to attend President Trump’s State of the Union and then failed to appear—allegedly having bet on Kalshi that he would not show. Kalshi flagged the activity, froze his account, and referred it to the CFTC. The company guards against abuse by running round-the-clock surveillance, but Heaslip conceded “we can’t catch everybody.”

Senator Merkley warned such trading might corrupt future elections: “The spending on campaigns isn’t about electing individuals who will best serve our nation, it’s about winning a bet. And that’s a serious form of corruption of elections in the United States.”

4. Are these markets… inevitable?

Jonathan Cohen, who leads sports-betting policy work at the American Institute for Boys and Men, said gambling is woven into the American character: “There’s always been a strain of the American dream that is not tied up with meritocracy and that is not tied up with hard work, that is tied up with gambling [. . .] which is why we’ve had lotteries that were fundamentally necessary to build the first infrastructure in colonial America. This is in some ways new and crazy and weird that you can bet on Taylor Swift album sales or gas prices in Miami tomorrow, but it’s also just the latest manifestation of this.”

Heaslip argued Kalshi simply meets a real, historic appetite for speculating on and hedging events: “There is a real desire—in both the public and in institutions—to trade their risk on all these events.” At a separate point in the event, he stated, “If you can accept that people want to use this product, the question then becomes what is the most fair version of this product. [. . .] In my view, market-derived pricing is better pricing for everybody.”

Despite their peer-to-peer design, these platforms are dominated by a small cadre of sophisticated users. The Wall Street Journal analyzed 1.6 million Polymarket accounts and found that 67%of all profits accrued to just 0.1%of users, while more than 70%of users lost money. As Lazarus put it: “the game’s not easy to win, but it’s been marketed as easy to win.”

5. If they are here to stay, is the CFTC up to the job?

The CFTC has fewer than 600 employees yet polices nearly the entire U.S. derivatives market, a market that has historically served more sophisticated users. Goldsmith Romero doubts it is ready to regulate tens of millions of prediction market users: “I don’t think that our [CFTC] playbook was sufficiently geared towards retail investors. [. . .] They’re going to need a lot more resources.”

The second problem is governance. The CFTC has five seats, with no more than three from one party—but since September of 2025 it has been a commission of one. That lone commissioner, Michael Selig, plans to propose and finalize regulation by himself.

Todd Phillips pressed a more basic question—whether prediction markets belong on the CFTC’s plate at all: “One of the reasons we had the financial crisis in 2007 was because Congress told the CFTC to stand down looking at financial derivatives, and the economy blew up. I don’t want to see the CFTC to take its eye off the ball, again, because it’s focusing on being a gambling regulator.”