The Future of Prediction Markets

As prediction markets gain mainstream visibility, the question is no longer whether these markets will be regulated, but rather how they will be regulated.

You’ve probably heard of Kalshi or Polymarket, the two dominant market participants in the prediction market. These platforms allow participants to buy positions that pay out based on whether a defined event occurs, such as election outcomes, geopolitical developments and entertainment awards to name a few.

Prediction market brings ambiguity to regulators: Are prediction market contracts derivatives tied to measurable real-world events, or are they wagers on uncertain outcomes? They are both: they contain financial market characteristics as well as gambling characteristics which is why regulators globally have struggled to classify prediction markets within traditional legal frameworks.

The biggest challenge for regulators lies in determining which events are suitable for wagering. Markets with outcomes that are official, immediate, universally recognised, and objectively verifiable, such as sporting events, entertainment and cultural awards, and tightly controlled political markets, are more operationally comparable to existing betting products and are therefore easier to oversee from a compliance perspective.

In contrast, prediction markets that are more subjective, evolving or politicly disputed outcomes create significant reputational risk, ethical concerns, integrity issues, political sensitivity, and market manipulation exposure.

Hence, the biggest question to ask yourself before integrating prediction market wagers is not merely the legality of the wager itself, but rather how the outcome is determined. The best emerging practices in this field suggest that operators should be required to:

1. publish clear and pre-defined resolution criteria for every market;
2. identify independent and publicly verifiable resolution sources prior to launch;
3. establish escalation procedures where source data conflicts;
4. provide transparent player-facing rules at the point of participation; and
5. retain market resolution documentation for regulatory audit purposes.

Additionally, from a product certification, prediction markets are now beginning to attract similar scrutiny as traditional gaming certification. Expect regulators to require independent testing laboratories to certify that the product operates as described, pricing and odds methodologies are fair, and transparent and customer funds and transactional records are adequately protected.

Furthermore, there is a convergence of gaming and financial compliance in the prediction market where regulators are now moving towards applying existing gaming AML, KYC and Geo-Blocking and Cross-Border compliance frameworks directly to prediction market products.

As a result, prediction market operators must increasingly navigate a combination of gaming laws, securities regulations, financial services legislation, crypto-asset frameworks, and data protection obligations.