Welcome to Chalk Talk, your legal playbook for the ever-evolving sports industry. Each month, our Sports Law team will draw up the X's and O's behind the legal, policy, and regulatory issues impacting your business. We'll tackle current and common issues shaping the industry and offer game plans to help you stay ahead of the curve. So lace up your cleats and join us for a monthly huddle you won't want to miss! This month we're talking about sports prediction markets.
Large sportsbooks like FanDuel and DraftKings collectively cover about 80% of the U.S. sports betting market, and are subject to significant and complex state regulations which impact their operations. But new platforms have recently opened "sports prediction markets," claiming they are not subject to the same regulatory oversight. Operators of these markets distinguish their "event contracts" from traditional sports betting because of the peer-to-peer nature of the contracts compared to the "betting against the house" model used by sportsbooks.
But not everyone is buying that argument. Several states and certain sports leagues have pushed back, raising concerns that these platforms may be circumventing sports betting regulations while offering a substantially equivalent product.
How Sports Prediction Markets Work
Unlike traditional sports gambling, where the sportsbook sets a line, prediction market operators, like Kalshi, allow users to buy and sell outcome-based event contracts. For example, if Kalshi creates a market for a baseball game between the Red Sox and the Yankees, users can choose to purchase "Red Sox Win" or "Yankees Win" contracts. Contracts always pay out $1.00 when the correct outcome occurs (and $0.00 when it does not), so if the public thinks the game is evenly matched, the "Red Sox Win" and "Yankees Win" contracts will each be available for $0.50.
But much like investing, users may find value in the price. Perhaps the Red Sox are on a winning streak and the Yankees' starting pitcher has an injury. In that case, purchasing several "Red Sox Win" contracts for $0.50 each may be a bargain. Market forces dictate the price of each contract, so, in this example, as users purchase more "Red Sox Win" contracts, these contracts become more expensive while "Yankees Win" contracts become cheaper.
Although many Kalshi contracts are structured in this binary fashion, other markets such as "Super Bowl Winner" allow users to purchase cheap contracts where various outcomes exist. Of course, nearly every outcome will pay out $0.00, because only one team wins the Super Bowl, but picking the correct team generates outsized returns.
Robinhood began partnering with Kalshi in March by providing its users access to Kalshi's prediction markets for the 2025 NCAA Men's Basketball Tournament. Robinhood describes event contracts as "a type of financial derivative…that pay out if the position held matches the correct outcome of the event; otherwise, they expire worthless." But some think that this sounds like dressed-up sports betting.
Legal Grey Areas and State Enforcement
Since 2018, when the Supreme Court struck down the Professional and Amateur Sports Protection Act (PASPA), regulation of sports betting has been left to the states. Today, sports betting is legal in 39 states and the District of Columbia, including by mobile device in most places.
State gambling regulators not only set age and other restrictions on who can wager, but also regularly control the number of operators through licensing schemes. Importantly, states also aggressively tax sportsbooks. Whether the product offered on platforms like Robinhood and Kalshi constitutes sports betting has significant ramifications from who can access the platform and whether the operator is required to implement safeguards, to whether the state is entitled to a portion of the revenue. Several states have challenged the assertion that event contracts are distinct from traditional sports bets by taking action against prediction market operators.
Currently, eight states (Maryland, New Jersey, Massachusetts, Connecticut, Illinois, Ohio, Nevada, and Montana) have either issued cease-and-desist letters or formally opened investigations into sports prediction markets arguing that the platforms are illegally operating sportsbooks within their borders. Other states have said they are contemplating investigations.
What's Next?
In addition to these recent challenges, the MLB and NBA have raised questions about consumer protections and oversight for prediction markets. Given increased scrutiny, sports prediction markets should take a close look at current regulations and whether they can successfully claim a distinction from regulated gambling activities. Leagues will also need to understand the current and future regulations in these markets, given the importance of sports gambling revenues and the need to emphasize the integrity of professional sporting events.
If you or your company would like to talk about sports prediction markets, please contact the authors or visit the Venable Sports Law team's web page. And subscribe to Chalk Talk here.