Prediction markets have become de facto sportsbooks, but oversight has not caught up: research

Prediction markets have evolved substantially from their original purpose as price-discovery mechanisms into platforms that operate functionally as sportsbooks, according to recent research highlighting a significant regulatory gap. Analysis of major platforms, including Kalshi, reveals that sports-related contracts now dominate trading activity, accounting for 85 percent of total volume—a composition that mirrors traditional betting exchanges far more closely than traditional prediction markets.

This shift reflects both market demand and the inherent appeal of sports wagering to retail traders. Prediction markets offer a regulatory pathway that differs from conventional sportsbooks in many jurisdictions, allowing operators to position themselves as derivatives or financial instruments rather than gambling venues. This classification has enabled platforms to operate with lighter regulatory oversight in certain markets, creating a competitive advantage over licensed betting operators subject to more stringent requirements.

The mismatch between operational reality and regulatory classification presents challenges for both market participants and authorities. If prediction markets are functionally indistinguishable from sportsbooks in terms of user behavior and market composition, the argument for differential regulatory treatment weakens considerably. Regulators face pressure to clarify whether these platforms should be subject to the same consumer protections, responsible gambling measures, and licensing requirements as traditional sportsbooks.

For the iGaming industry, this regulatory ambiguity creates both opportunity and risk. Operators leveraging prediction market structures to circumvent sportsbook regulations may face future enforcement actions or forced compliance upgrades. Conversely, established sportsbooks operating under comprehensive licensing frameworks may advocate for regulatory harmonization to level the competitive playing field.

The research underscores an emerging tension in modern gambling regulation: as financial and betting products converge functionally, regulatory frameworks must adapt to prevent regulatory arbitrage. Jurisdictions will likely move toward clearer definitions and more consistent oversight of prediction markets, particularly as their sports-betting dominance becomes undeniable.