For years, the operators of prediction markets have maintained a carefully curated distance from the world of sports betting. They describe their platforms not as casinos, but as sophisticated financial tools—places where users trade contracts on the outcome of events, much like trading stocks or commodities. However, a recent legal filing by Kalshi, one of the industry’s most prominent players, has created a significant rift between the company’s public narrative and its official paperwork.
In a submission to the United States Patent and Trademark Office (USPTO), Kalshi classified itself as a gambling operator while seeking protection for the term “prediction market.” The filing included several financial categories, but it also explicitly listed multiple betting classifications. This move comes at a precarious time for the industry, as prediction market regulation becomes a focal point for state attorneys general and federal lawmakers who view these platforms as unregulated betting shops operating under a financial veneer.
The contradiction is stark. While Kalshi has spent millions lobbying to avoid being legally designated as a gambling entity, its own trademark application suggests a business model that overlaps heavily with the betting industry. When questioned about the filing, Kalshi stated that its approach was “intentionally broad” and intended to protect the company from competitors in adjacent markets. Yet, the USPTO maintains strict guidance that applications must accurately reflect the nature of the business, leaving the company vulnerable to claims that it has finally admitted its true identity.
The legal battle over ‘Event Contracts’
At the heart of the dispute is how these platforms function. Unlike a traditional sportsbook where a bettor places a wager against a house, prediction markets allow users to buy and sell contracts. If an event occurs, the contract pays out; if it does not, it becomes worthless. Because these are framed as derivatives, they fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC) rather than state-level gambling commissions.
This regulatory loophole allows prediction markets to operate in states where traditional sports betting remains illegal. However, the shield is cracking. Several states have filed civil lawsuits to force these platforms to obtain gambling licenses, which would subject them to stricter consumer protections and oversight to prevent market manipulation.
The escalation has moved beyond civil disputes in some jurisdictions. Arizona has taken the most aggressive stance, filing criminal charges against Kalshi. The state accuses the firm of running an illegal sports and election betting operation, arguing that the “financial contract” label is a semantic trick designed to bypass state law. Simultaneously, two U.S. Senators have proposed legislation that would explicitly ban prediction markets from offering contracts tied to sporting events.
The risk of insider trading and manipulation
Critics of the current system argue that prediction markets are even more susceptible to corruption than traditional betting. Because they rely on a peer-to-peer exchange of contracts, a few wealthy “whales” or individuals with non-public information can swing the market price, creating a distorted reality of what is likely to happen.
This concern is not theoretical. Major League Soccer (MLS), which maintains an exclusive partnership with the exchange Polymarket, was forced to ban two players earlier this year for betting on matches. The incident highlighted the porous boundary between those who play the game and those who trade on its outcome, raising fears of insider trading that could compromise the integrity of the sport.
Leagues bet considerable on ‘Fan Engagement’
Despite the legal turbulence, major sports properties are doubling down on these platforms, viewing them as a way to modernize fan engagement. Major League Baseball (MLB) recently entered a multi-year agreement with Polymarket reportedly valued at US$150 million. To mitigate the risks of corruption, the deal includes an integrity framework designed to restrict markets on high-risk variables, such as individual pitches or umpire decisions.
The latest league to join the fray is LaLiga, Spain’s top professional soccer division. In a first for a major European league, LaLiga has signed an exclusive partnership with Polymarket for the U.S. Market. The strategy is twofold: generate immediate revenue and use the “gamified” nature of prediction markets to lure North American fans into following matches in real time, thereby increasing the value of future media rights.
“Our goal is to give fans a more expressive way to follow the game, where opinions on players, matches and season outcomes can be reflected in real time,” said Shayne Coplan, founder and chief executive of Polymarket. “Partnering with LaLiga brings that level of interaction to one of the most passionate global fanbases and introduces a new, more dynamic way for North American audiences to engage with the league.”
The contrast in philosophy is evident when comparing LaLiga to the English Premier League. While LaLiga permits its clubs to sign shirt sponsorships with betting firms and partners with prediction exchanges, the Premier League has moved in the opposite direction. The English league has no official gambling partners, and its clubs will be banned from featuring gambling sponsors on the front of their jerseys starting next season.
Comparing the Landscape: Prediction Markets vs. Sportsbooks
To understand why this legal fight is so intense, it is necessary to look at the fundamental differences in how these two industries are governed and perceived.
| Feature | Prediction Markets (e.g., Kalshi, Polymarket) | Traditional Sportsbooks (e.g., FanDuel, DraftKings) |
|---|---|---|
| Primary Regulator | CFTC (Federal) | State Gambling Commissions |
| Legal Mechanism | Derivatives/Event Contracts | Wagers/Bets |
| Market Structure | Peer-to-Peer Exchange | Bettor vs. House |
| Access | Available in non-betting states | Only in legalized states |
| Primary Risk | Market Manipulation/Insider Trading | Problem Gambling/House Edge |
Disclaimer: This article is provided for informational purposes only and does not constitute legal or financial advice regarding the use of prediction markets or derivatives trading.
The immediate future of the industry likely rests in the courts. As Arizona’s criminal case against Kalshi progresses, it will serve as a bellwether for whether the “financial asset” defense can hold up under the scrutiny of state criminal law. The proposed Senate legislation could fundamentally reshape the business models of these firms by stripping away their most popular product: sports contracts.
We will continue to monitor the USPTO’s response to Kalshi’s trademark filing and any further legislative movements in the Senate. Do you believe prediction markets are a legitimate financial evolution or simply gambling with a new name? Share your thoughts in the comments below.
