Kalshi vs Polymarket vs Sportsbooks: Regulation Explained

Learn about the regulatory differences between prediction markets like Kalshi and Polymarket, and traditional sportsbooks, such as DraftKings and FanDuel. 

Prediction markets have risen virtually out of nowhere, rapidly gaining brand recognition and prominence. They’ve also quickly gained popularity because they allow users to trade on the outcomes of sporting events, politics, and much more through event contracts, which are modeled on financial derivatives. 

It’s important to understand the differences in regulatory structure between the two markets. DraftKings and FanDuel are sports betting operators. Their business model has their organizations operating as bookmakers. Bookmakers create market opportunities around different sports outcomes. For example, on a team to win a specific event, or a player to register a fixed number of statistics in the event. 

Bookmakers accept wagers on both sides of an outcome and price in vigorish, a built-in fee or “house edge” that ensures the bookmaker makes a profit on both potential outcomes. Sportsbooks are in the business of making money, regardless of the outcome. 

Sports betting was illegal in most states until 2018, when PASPA (the Professional and Amateur Sports Protection Act) was struck down by the Supreme Court. This allowed individual states to legalize sports betting through state-level legislation and regulation. 

Since that decision, states have decided whether to allow their residents the opportunity to wager on sports. State-level laws on the operation and regulation of sports betting companies are passed, and operators like DraftKings and FanDuel then apply to operate in the state. There is no federal legislation on sports betting at this time. 

Meanwhile, prediction markets are an entirely different beast in terms of operation, scope, and regulation. Prediction markets are not bookmakers. They function as financial exchanges that match traders with prices on event contracts, and span markets from sports to climate, finance, politics, and more. Exchanges like Kalshi and Polymarket operate in a peer-to-peer model. There’s no middleman like a bookmaker, so there’s no need for a vigorish here. Exchanges take transaction fees from both makers and takers to keep the marketplace open. 

Prediction markets have existed in concept for decades, but didn’t really gain mainstream acceptance until the last few years, when a federal appeals court stated that they could offer event contracts on political outcomes. Prediction markets are regulated as financial exchanges by the Commodity Futures Trading Commission (CFTC) and thus can offer event contracts on the outcomes of sporting events in states where sports betting is not legal.  

Sports betting operators and state regulators alike have challenged the legitimacy of prediction markets. Sports betting operators are concerned that prediction markets circumvent sports betting legislation and create opportunities for consumers to wager on sporting event outcomes without being held to the same level of regulatory compliance. 

State legislatures are also concerned that prediction markets aren’t paying state taxes, which are desperately needed for legitimate causes, like education and health care.

With federal legislation in place that allows prediction markets to operate legally across the country, combined with the peer-to-peer nature of exchanges, which deliver truer price matching than sportsbooks, it’s easy to see a future where prediction markets replace sportsbooks in terms of trading volume.