Prediction Markets: Opportunities and Issues

Prediction markets were once a niche academic experiment — the University of Iowa launched the first modern version in 1988 to test whether market pricing could outperform political polls. It could, and often did. Today, platforms like Kalshi and Polymarket process tens of billions of dollars in trades annually, covering everything from election outcomes to geopolitical events to whether a foreign leader wore a suit on a given day. Along the way, a tool with genuine utility for governments and corporations has drifted into something that looks, in practice, a lot like an unregulated gambling app — with no age floor, contested resolutions decided by token-weighted votes, and a documented national security risk from insider trading by people with access to nonpublic information.

In this policy brief, Senior Fellow Heberto Limas-Villers takes prediction markets seriously as both a forecasting instrument and a policy problem. He makes the case that the underlying design — where traders profit only by being right — has real value for hedging risk and generating probability estimates that can complement expert analysis. But he also catalogs the ways the current legal vacuum has allowed the major platforms to capture most of that value for the benefit of sports bettors rather than the public interest. With the CFTC under the Trump administration having largely stood down from oversight, states are suing and issuing cease-and-desist orders while courts keep preempting them on federal preemption grounds.

The brief closes with a focused set of recommendations for federal legislation: a uniform 21-and-over age floor with real verification, insider trading and manipulation rules designed specifically for event contracts, and narrow public-interest restrictions that preserve legitimate forecasting markets while keeping the worst contracts off the board.