The prediction market industry has experienced explosive growth in 2025, with platforms like Polymarket and Kalshi processing billions of dollars in trading volume and attracting unprecedented mainstream attention. As these markets mature from niche curiosities into significant financial platforms, they operate in an increasingly complex regulatory landscape that presents both opportunities and challenges for startups and established players alike.
The Remarkable Rise of Prediction Markets
Prediction markets have surged past $2 billion in weekly trading volume, marking a dramatic transformation in how people assess and bet on future events. As of September 2025, Kalshi’s monthly volumes topped $1.3 billion, nearly double Polymarket’s $700 million, with both platforms having already executed $12 billion in trades in 2025.
What began with political events, particularly the 2024 presidential election, has expanded far beyond. Both platforms now offer contracts on sports, cultural events, corporate outcomes, and economic indicators, effectively creating new markets for information aggregation and risk management. The NHL has even recognized the growth of these platforms, announcing landmark multiyear partnerships with the entities.
The industry’s growth has attracted substantial venture capital investment. Kalshi raised $185 million in June 2025, aiming for a $5 billion valuation, while Polymarket is reportedly in talks to reach a valuation between $9 and $10 billion. These valuations reflect investor confidence that prediction markets represent a fundamental shift in how financial information is processed and acted upon.
Operating in the Grey: The Regulatory Complexity
Prediction markets occupy a unique and often contentious position in the regulatory landscape. Unlike traditional sports betting, which falls under state jurisdiction, prediction markets are subject to federal oversight by the Commodity Futures Trading Commission (CFTC). However, the application of federal commodity derivatives law to these markets remains a work in progress.
The CFTC’s Evolving Stance
The CFTC has identified several key obstacles to balanced regulation of prediction markets, including existing Commission orders, interpretations on event contracts, federal court opinions, and CFTC legal arguments in ongoing cases. The agency has acknowledged that its approach needs modernization.
Acting Chairman Caroline D. Pham stated that “the undue delay and anti-innovation policies of the past several years have severely restricted the CFTC’s ability to pivot to common-sense regulation of prediction markets”, signaling a shift toward a more accommodating regulatory posture under the current administration.
The Federal-State Tension
Perhaps the most significant regulatory challenge facing prediction markets is the conflict between federal derivatives regulation and state gaming laws. Kalshi and Polymarket rely on legal reasoning that “events contracts” are different from gambling, though this distinction remains legally contentious.
State regulators have pushed back aggressively. Arizona’s gaming director formally urged the CFTC to take action against sports prediction markets, arguing that these platforms are effectively operating as sportsbooks without appropriate oversight and sidestep state gambling laws. Pennsylvania’s Gaming Control Board similarly considers sports event contracts as “regulatory arbitrage,” as prediction markets bypass state licensing requirements including background checks, licensing fees, and consumer protection standards.
This creates significant uncertainty for prediction market operators, who may face cease-and-desist orders from state authorities even while operating under CFTC registration. The outcome of ongoing litigation will likely determine whether federal licenses can override state restrictions.
Platform-Specific Regulatory Paths
The two market leaders have taken different approaches to regulatory compliance:
Kalshi has pursued a regulation-first model, securing CFTC registration as a designated contract market (DCM) and winning a federal court battle over political contracts. As a centralized U.S.-based exchange, Kalshi requires full Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance.
Polymarket began as a decentralized platform but is now pursuing U.S. market access through acquisition. Polymarket acquired licensed derivatives exchange QCX for $112 million to facilitate its U.S. reentry, and the CFTC issued a no-action letter in September 2025 that exempts the platform from certain reporting and recordkeeping requirements. This represents a significant milestone, as Polymarket was forced to block American users in 2022 following a CFTC settlement for operating an unregistered derivatives trading platform.
Current State of Regulation
The regulatory environment for prediction markets in 2025 can be characterized as evolving and somewhat favorable, but far from settled:
- CFTC Approval Pathway: The 2025 CLARITY Act seeks to classify most cryptocurrencies as commodities, creating a unified regulatory framework for prediction markets and crypto derivatives. This would provide more clarity for blockchain-based platforms.
- Ongoing Litigation: Multiple state-level lawsuits are proceeding through courts, with outcomes that could reshape the industry’s legal landscape.
- Payment Processing Challenges: Regulated U.S. venues like Kalshi clear trades in dollars through established banking rails, requiring bank partnerships, payment processors, and compliance vendors as essential infrastructure. The need for robust payment processing compliance adds another layer of complexity.
- Insider Trading and Market Manipulation Concerns: The Commodity Exchange Act prohibits manipulative or deceptive conduct, including misuse of material non-public information, creating both criminal and civil liability risks for individuals and platforms.
How Heitner Legal Can Assist Prediction Market Startups
The complexity of operating a prediction market platform requires sophisticated legal counsel that understands both traditional financial regulation and emerging fintech frameworks. Heitner Legal offers comprehensive support for prediction market startups and similar entities navigating this challenging landscape.
Regulatory Compliance and Strategy
Our team helps prediction market platforms develop compliance strategies that address both federal CFTC requirements and state-level considerations. This includes:
- Advising on CFTC registration requirements for designated contract markets (DCMs) and derivatives clearing organizations;
- Developing comprehensive compliance programs that address market surveillance, anti-manipulation controls, and dispute resolution procedures;
- Navigating the complex interplay between federal derivatives law and state gaming regulations; and
- Assisting with contract design to ensure compliance with CFTC standards while maintaining commercial viability.
Legal Opinions for Payment Processors
Payment processors often require formal legal opinions regarding the legality of prediction market platforms before agreeing to provide services. Heitner Legal has extensive experience preparing these critical opinions, which address:
- Whether the platform’s operations comply with applicable federal and state laws;
- The regulatory status of event contracts as derivatives rather than illegal gambling;
- Compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements;
- Data security and privacy compliance, including PCI DSS standards; and
- Risk assessment for payment processor liability.
These legal opinions are essential for securing and maintaining payment processing relationships, which form the backbone of any prediction market platform’s operations.
Corporate Structure and Transaction Support
We assist with:
- Entity formation and corporate structuring to optimize regulatory positioning;
- Capital raising transactions and compliance with securities laws;
- Acquisition strategies, including purchasing existing CFTC-licensed entities; and
- Terms of service, user agreements, and platform rules that balance user experience with legal protection.
Ongoing Legal Counsel
The prediction market regulatory landscape continues to evolve rapidly. Heitner Legal provides ongoing counsel to help platforms:
- Monitor regulatory developments and adjust compliance programs accordingly;
- Respond to regulatory inquiries and enforcement actions;
- Manage disputes with users, competitors, and regulators;
- Develop internal compliance training programs for employees; and
- Establish whistleblower and internal reporting mechanisms.
Litigation Defense
Should disputes arise, we have experience defending prediction market operators in:
- State regulatory proceedings and cease-and-desist challenges;
- Federal court litigation involving CFTC regulations;
- Contract disputes with payment processors, vendors, and partners; and
- Intellectual property matters.
Looking Ahead
Prediction markets represent an innovative intersection of finance, technology, and information markets. While regulatory uncertainty remains, the trend appears to favor continued growth and increasing acceptance of these platforms as legitimate financial tools rather than mere gambling operations.
For entrepreneurs and companies looking to enter this space, success requires more than just innovative technology. It requires a sophisticated legal strategy and a robust compliance infrastructure from day one. The platforms that will thrive are those that proactively address regulatory concerns while building products that serve genuine market needs.
Heitner Legal is positioned to guide prediction market startups through every stage of their journey, from initial formation through scaling operations and navigating regulatory challenges. Our deep understanding of fintech regulation, payment processing compliance, and emerging market structures makes us uniquely qualified to serve this dynamic industry.
Contact Heitner Legal to discuss how we can support your prediction market venture or help you navigate the complex regulatory environment surrounding event contracts and derivatives platforms. Our team is ready to provide the strategic legal counsel you need to build a compliant, sustainable prediction market business.