A new player has entered the sports scene, Kalshi. This is a regulated financial exchange and prediction market platform. It’s challenging traditional sportsbooks by offering an alternative that operates under a different framework. The platform is starting to turn regulators’ heads, so let’s take a look at this new approach to sports betting.
Kalshi allows users to trade on the outcome of real-world events, ranging from economic indicators to weather patterns and political developments. It has recently started offering markets for sporting events. This has caused quite a stir in the finance and gambling industry. Many are now questioning whether Kalshi is simply clever or on a collision course with U.S. gambling laws.
What is Kalshi?
Kalshi is not a sportsbook. It operates as a Designated Contract Market (DCM). It’s essentially a futures exchange that’s regulated by the Commodity Futures Trading Commission (CFTC). It’s a prediction market, where you buy “yes” or “no” contracts on whether something will happen. Each contract is binary and settles at $1. If you buy a contract at $0.65 and inflation exceeds 5% and it does, you earn $1. If not, you lose $0.65. It has a very similar setup to betting odds, but it’s regulated as a financial instrument and not a wager.
This distinction is essential and is what allows Kalshi to market itself not as a betting platform, but as a tool for hedging risk or expressing views on certain outcomes. Very much like futures trading. Some of the key differences between Kalshi and sportsbetting platforms include:
- No house edge: Users trade peer-to-peer and Kalshi takes transaction fees, not a cut of losses.
- Nationwide reach: Kalshi can operate everywhere, even in jurisdictions where sports betting and online gambling is illegal.
Disrupting Sportsbooks without Offering Sports
Traditional sportsbooks thrive on volume, emotional engagement and in-the-moment entertainment. They lean heavily into sports betting offers like risk-free bets and deposit bonuses to invite users into the adrenaline-charged world of sports betting.
Kalshi doesn’t position itself as a sportsbook, but it has recently expanded into sports-related contracts. Kalshi’s March Madness markets recorded over $200 million in trading volume on tournament-related questions. On the outside, this looks and feels like betting. However, the key difference here is that Kalshi isn’t setting odds or taking bets directly. It is simply facilitating trades between users, similar to how a stock exchange works.
Prediction Markets: A Legal Gray Area
There has always been a fuzzy line between prediction markets and gambling laws. There have been a number of attempts to create real-money prediction markets in the U.S., but Intrade and Predictit have faced regulatory limitations.
Kalshi has walked carefully, securing CFTC approval and presenting its contracts as tools for risk management. However, in 2023, the CFTC rejected Kalshi’s proposal for U.S election outcomes. Although election betting is popular overseas, it has long been prohibited in the U.S. When Kalshi proposed offering these contracts as financial instruments, the CFTC ultimately rejected the idea with concerns over integrity, manipulation, and public perception.
A Regulatory Tug-Of-War
State regulators argue that contracts on sports outcomes are the same as placing a sports wager. A great example of this is a recent Oklahoma City Thunder vs the Minnesota Timberwolves match. Both a $350 wager on the Thunder in a sportsbook and a $350 contract on Kalshi yield a $109 profit if successful. This was a huge red flag to many regulators and has prompted several states to issue cease-and-desist orders.
Kalshi has countered these orders and even gone to court with a few states, including Nevada and New Jersey. By pointing to federal oversight, Judges have ruled in favor of Kalshi. This has meant the company can continue to offer sports contracts in two of the biggest legal betting markets in the country.
Traditional Sportsbooks Are Feeling the Pressure
Big players in the sports betting industry like DraftKings and FanDuel are watching very carefully. With Kalshi and similar platforms like Robinhood and Sporttrade expanding federally regulated contracts. Sportsbooks may soon face parallel offerings, especially in states where sports betting is absent. This is a huge threat not because it’s offering the same product, it’s because it’s offering a similar experience with a different legal framework.
Sportsbooks are licensed on a state-by-state basis. Whereas Kalshi operates federally. This means it can reach users in all 50 states, even those where sports betting is illegal. It doesn’t have to negotiate separate agreements or comply with different state-level regulators. This comes with both opportunities and risks. While prediction markets could make society more information-efficient. It could also lead to unregulated gambling behaviour under the guise of financial trading.
Expert in gaming law and attorney at Holland & Knight, Johnny P. ElHachem, shared that this presents a competitive challenge and opens the door for widespread use of sports-based event contracts outside the sportsbook regulation. He also pointed out a regulatory dilemma, unsure of how these markets will be governed and policed.
Coexistence or Collision
There are mixed opinions on whether prediction markets and sportsbooks can coexist. Some in the industry believe both models can operate in parallel. Whereas others see Kalshi as a backdoor around existing gambling regulations and undermining them.
A ruling in Kalshi’s favor could force a broader reckoning. This could even impact federal regulation of all betting and prediction markets, which could have a huge impact on the industry. Whereas if Kalshi is ultimately deemed a sportsbook. It could be banned in many states or forced to undergo expensive licensing and compliance measures.
What Does the Future Hold for This Predictions Market Innovator?
For the time being, Kalshi remains in operation. It continues to offer event contracts across a wide range of topics and counters any lawsuit that comes its way. But with multiple lawsuits pending and more regulators circling, its long-term viability is still uncertain.
By positioning itself as a federally regulated event exchange, Kalshi has managed to sidestep the traditional sportsbook model, opening the door to a new kind of speculation. The big question now is: will regulators let it continue or will they be able to push back and win?
