Are Prediction Markets Gambling? A Lot Rides on the Answer.

From The New York Times, I'm Natalie. Kitroeff. This is The Daily. [music]. >> [music]. >> Over the last year, America has [music]. witnessed the explosion of prediction. markets, platforms like Kalshi and. Polymarket, which allow you to wager. [music] on just about anything, from who. will win a football game to the weather. in New York City.

But now, those hugely popular [music]. platforms are in the middle of a legal. battle that could determine whether they. get reined in. >> [music]. >> or whether betting on everything becomes. the norm everywhere. Today, my colleague David [music]. Yaffe-Bellany explains. >> [music]. >> It's Tuesday, [music] September 29th.

>> [music]. >> David, welcome back to the show. It's. wonderful to have you. >> Thanks for having me. >> So, the last time you were here, you. walked us through the rise of these. prediction markets. And since then, they've gotten even bigger and they've. become a target of a growing number of. legal challenges. So, can you just start. by giving us a lay of the land here? Where do things stand? >> Yeah, a lot has happened. These. platforms have been exploding for.

months, but now they're exploding even. more, if that's possible. There was. about $38 billion. last month on the biggest prediction. market. That's already up to $42 billion. in the month of September. >> Wow. >> So, there's a real burst of consumer. interest [music] in these products. And. they've sort of become ubiquitous. >> Hey, have you heard about this. prediction market, Kalshi? >> You can't turn on the TV and watch a. sports game without getting bombarded. with a prediction market ad.

>> With Kalshi, you can trade on anything. >> From culture to the weather. >> Unlike sports books, Kalshi doesn't set. the odds. Other users do. >> There's a recent one with LeBron James. >> It's live trading. You got to stay. [music] on your toes. >> Morning, Eli. >> What up, LeBron? >> There's another recent one with Sydney. Sweeney. >> Trading [music] on sports. Trade it balls. >> It just seems like all the top. celebrities are getting kind of sucked. into this world. >> Right. And now that football season has. started, it is truly inescapable for. some of us.

>> Absolutely. And football season is. sports betting season, and that's surely. going to lead to another burst in. popularity and more money flowing into. these platforms. [music]. But at the same time that all of this. interest has surged, there have also. been a succession of scandals around. prediction markets. >> A US special forces soldier who helped. to plan the January capture of. Venezuelan President Nicolas Maduro has. been indicted for allegedly using. classified information about the raid to.

place bets in the prediction market. >> And most of them have revolved around. insider trading, which of course is the. idea that you could take confidential. information and use it to make money on. these platforms. >> Gabriel Perez is accused of making more. than $90,000, nearly 100,000 bucks on. Kalshi by betting on what the president. would say during his speeches. Remember, this is the guy running the prompter. >> [music]. >> For instance, there might be a. prediction market question about, say, who's going to attend the State of the. Union. And [music] if you have.

confidential advance information about. that, then you can bet based on [music]. it. >> This morning, a sources say disgraced. former Congressman George Santos is. under investigation for possible insider. trading [music] on the prediction market. Kalshi. >> And in fact, exactly that scenario. played out this year when George Santos. placed a bet on his own attendance at. the State of the Union. >> Oh my [music] god. >> By skipping the speech, sources say he. pocketed tens of thousands of dollars. Kelsey froze his account and a. >> He got caught and ended up having to pay.

a big fine and it was the latest fun. episode [music] in the never-ending. George Santos saga. >> Yikes. >> So, as you can imagine, with all this. going on, money flowing into these. platforms, scandals erupting all the. time, a lot of people in the legal world. have been wondering, who's minding the. shop? What should the rules look like? How should these platforms be regulated? And the most aggressive player in all. that has been the states, and in. particular the state attorneys general, who are the officials responsible for.

enforcing state laws. >> Hm. >> Over the summer, 44 states signed a. letter attacking prediction markets, calling them basically online casinos. that prey on young people. And as of. last month, about 20 states were. involved in litigation against the. prediction market companies. >> And what's that litigation actually. about? >> The fundamental question at the heart of. all of these lawsuits is. whether what's happening on a prediction. market constitutes gambling and whether.

it should be regulated by state. governments or by the federal. government. >> Okay, I want to get into that question. and understand it, but before we do, just say why it matters whether these. platforms are regulated by the state. governments or by the federal. government. >> It matters because ultimately it could. determine whether people everywhere are. allowed to use these platforms the way. they are now, or whether the future of. this industry is much more limited. That's really what's at stake here,

whether this crazy moment that we're in. where it almost feels like a. free-for-all, like the wild west, whether that continues and even expands, or whether this industry gets reined in. and has to follow an entirely new set of. rules that might limit what's going on. quite significantly. >> Okay, so just walk us through the legal. arguments for the states regulating. versus the federal government. >> It's a pretty fascinating debate, and. ultimately it comes down to kind of an. existential question about these.

markets, which is are they similar to a. casino where everyone's gambling, or are. they more like the stock market where. people are investing? They're placing. trades, they're making informed. decisions. And what the state. [clears throat] says you just look at. this stuff, it's obviously gambling. Look how it's marketed. Look at what. people are doing on this platform. They're betting on the outcome of sports. games. How is that not gambling? >> And states regulate sports sites, right? So, they're saying we get control over. this. >> Yes, since 2018 the Supreme Court gave.

the states the ability to regulate. sports betting, and the states say. that's what this is. But, the companies. come back and say no, we're actually. doing something fundamentally different. that's much more like investing where. people are actually making sophisticated. financial decisions and using these. platforms like they're vehicles for. complicated investments. >> Okay, I think for a lot of people their. gut reaction to that is just going to be. wait, obviously these are betting apps,

right? So, just break down exactly how. this argument works, how this isn't. actually gambling. >> Prediction markets are structured. differently than traditional sports. books. So, in traditional sports books you've. got the person placing the bets, and. then you've got the house which sets the. odds. And when the person who's betting. loses, the house makes money. So, you're. set up in this kind of like oppositional. relationship between the company and the.

user. >> [music]. >> And that can create some predatory. incentives in how sports books are run. The The markets are structured. differently. They're structured more. like a financial exchange where on each. side of a bet, you've got a different. user. So, I'm not vying against the. house, I'm vying against somebody else. who's also betting on the platform. So, if I bet $5 that the Eagles will win,

someone else is betting $5 that the. Bears will win. And so, [music] it's a. peer-to-peer interaction as opposed to. one that's run by this kind of. centralized house that benefits when you. lose. And also, [snorts] the markets take. transaction fees. They're getting a cut. of each of these bets. And so, they make. the point, we will get our cut if you. win or if you lose. You know, we don't. have a stake [music] in your success or. failure. >> Okay, so the broad argument here that. the prediction markets are making is,

look, we just have a bunch of people. reacting to each other and setting the. price, setting the odds together. >> Exactly. And that's how a traditional. financial exchange is set up. That's how. the stock market works. And so, that's. what these companies are pointing to. >> Okay, I have to say that argument has. some logic to it that they are kind of. acting more like a financial market than. like a bookie. >> It does, [snorts] absolutely. They're. different from bookies. I mean, they're. correct in saying that. But the point. that the states come back and make is.

that it can still be gambling. And they. point at things like marketing. Marketing in which companies have used. words like bet that clearly seem to. characterize what's happening as. something akin to gambling. They point. to a kind of looks like a duck, quacks. like a duck type of test. >> Hm. >> And I think the point there is the way. that consumers interact with these. platforms is no different than how they. interact with sports books. But Kalshi. says that actually users are using the.

platform in a different way. That users. see it as fairer than those kind of. traditional betting platforms and that. they're also just fundamentally going to. these sites for a different kind of. thing. That they're treating them as an. opportunity to make complicated. financial maneuvers. And the concept. that Kalshi points to most often is. called hedging. And that's the idea that. you can place a trade on one of these. platforms that essentially protects you.

from another possible outcome. >> Like, give me an example. >> One that Kalshi has pointed to is an ice. cream shop in California that placed. bets on the weather. So, they would bet. that it would rain on a certain day. If. it rained, then they'd have fewer. customers, less revenue for that day, but they'd be hedged on Kalshi because. their bet would pay out and they'd make. money as a result of the rain. >> Right. The idea is that this ice cream. shop is going to Kalshi specifically.

basically to take out an insurance. policy on the possibility that it rains, right? If it's sunny, they get a bunch. of customers. If it rains, they get. their Kalshi payout. >> Exactly. And Kalshi is really excited. about examples like this because what it. looks like is, "Wow, something that's. different from betting." A use of this. platform that feels more financial than. it does like gambling. >> All right, I could see why they would. want to cite that, but how common is. that actually, David? >> I don't have any concrete numbers on.

exactly how many people are doing that, but the examples that Kalshi has pointed. to have really felt like kind of. isolated examples. And the business. definitely wants this to become a more. common feature of how it's used, but in. my reporting, I have encountered a lot. of people who don't use Kalshi or any of. these platforms any differently than a. FanDuel or DraftKings. They're going on. so that they can gamble. In some cases, they're excited that they have a way to. gamble that didn't exist before, maybe. because they were in a state where it.

wasn't allowed. I've seen no evidence. that this is how the majority of people. are using Kalshi. >> All right. So, you started by saying. that this all of this has become this. massive legal fight. What have the. rulings been so far? Where do things. stand? >> There's been a real mix of rulings. across the country, but crucially we've. seen what's known as a circuit split, which means that two federal. appellate-level courts have reached. opposite conclusions about who should. regulate these markets. So, the third.

circuit, which covers New Jersey and. some other places, has ruled in favor of. the prediction market companies, saying. that these products belong under the. supervision of a federal agency called. the Commodity Futures Trading. Commission, or the CFTC. So, that's what. the prediction market companies want. >> Okay. >> But, another appellate court, the ninth. circuit, has reached the opposite. conclusion. >> [music]. >> That actually the states do have a stake. in regulating these platforms and should. be allowed to do so.

What that means is that a legal conflict. has been set up of a type that the. Supreme Court often likes to weigh in. on. And everyone really expects that. this is going to go to the Supreme Court. in the near future. It's not an absolute. guarantee, but that appears to be where. things are headed. >> And do we know when this potential. showdown at the Supreme Court will. happen? >> We don't know exactly, but it's likely. to take months, maybe even years. But, in the meantime, there's sort of an. X factor here that's really influencing.

how these platforms are regulated. [music] And that's the Trump. administration, and also the Trump. family. >> [music]. >> We'll be right back. Okay, David. How does President Trump. and his family factor into all of this, this battle over prediction markets? >> So, Donald Trump Jr. has a pretty. significant financial stake in the.

prediction market industry. And that's. largely through both Kalshi and. Polymarket. So, if those companies. succeed, his shares will rise in value, and he's positioned to make a lot of. money. And this is really just the. latest iteration of something we've seen. over and over during the second Trump. administration. Last year, we saw it in. the crypto industry. The Trump family. has its own crypto business at the same. time that the administration is. regulating crypto. So, there's sort of. an alignment between political decisions.

that the president is making and the. financial bottom line of the family. And. now, that's happening again here. >> Like what? What do you mean? >> So, for instance, earlier this year, a. group of Republican attorneys general. got together for a big meeting in New. Orleans. It was a private, closed-door. event. And we learned in our reporting. that the top speaker at this event was. none other than Donald Trump Jr. >> Hmm. >> And what did he say to these state AGs.

who, remember, are the crucial players. in this legal fight? >> Right. >> He made the case that prediction markets. ought to be regulated by the federal. government. And that was a sort of. powerful and pretty pointed message for. him to be sending just as this big legal. battle [music] was kind of picking up. steam. >> I mean, it is pretty remarkable to have. the son of the president going to. attorneys general and directly telling. them to lay off of platforms that he. has, [music]. you said, a direct financial stake in.

>> Absolutely. Donald Trump Jr. technically. isn't part of the administration, [music]. of course, but when somebody with that. name gets up on stage and says that kind. of thing, it carries a lot of weight. But the administration itself is also. really active on this front in ways. that, frankly, are pretty unprecedented. >> Okay, explain that. >> So, the administration's approach to. prediction markets is centered around. that agency that I mentioned before, the. Commodity Futures Trading Commission, the CFTC. This is a really small,

backwater agency. It's not staffed at. the levels of the SEC, which is the. bigger, sexier financial regulator in. Washington. >> Right. By the way, I don't know that. anybody has ever described the SEC as. sexy, so. >> Well, we're talking about financial. regulation here. So, in relative terms, you know, I think the SEC qualifies. >> Right. >> Historically, the CFTC has been in. charge of overseeing markets for farm. goods, like soybeans or wheat. And the.

types of financial contracts that are. involved in trading those types of goods. are similar to the financial contracts. that prediction markets are using to. trade on the outcome of future events. So, the CFTC has a stake in this. prediction market world. And the Trump. administration has a really transformed. this agency. Trump appointed a regulator. to lead it who is sympathetic to the. tech world. When he worked as a lawyer. in private practice, he worked with.

prediction market firms. And so, he's. come into this agency with a really kind. of pro-prediction market mindset. And. crucially, he has weighed in in this. legal battle in a way that, frankly, doesn't have much precedent and is sort. of astonishingly aggressive. >> How? How so? >> The CFTC has filed lawsuits against nine. states that are trying to regulate. prediction markets, arguing that they. should back off, that they have nothing. to do with this, and that this giant. emerging industry should be the province.

of the little CFTC. That's something the CFTC has never done. before in its decades-long history. The agency's taken other aggressive. steps as well. I mean, the example. that's gotten the most attention is a. case in Michigan where a judge. against Kalshi saying that the company. had to unwind trades that it was. offering in the state. Basically, take. the money back that had been wagered on. certain topics. The CFTC saw that.

ruling, swooped in, and said, "This. constitutes a market emergency. We're. invoking emergency powers and telling. Kalshi ignore that court order.". >> Hm. >> Again, a highly unusual situation. A. federal agency saying to a company, "Disobey a court order.". >> And doing so on the basis of a. theoretical emergency? Like the argument. here was. no, don't unwind your trades, keep. allowing people to bet on your platform. because not doing so would have.

constituted some sort of crisis? >> Yeah, a crisis of trust in the. prediction market landscape, basically. It's saying, "This is a market. emergency. This is a market we regulate. and now there's uncertainty about how it. operates and so we need you to keep. operating.". >> Just to step back, David, and think. about the other side here. Can you walk. me through the motives of the states? Why do they want to regulate these. companies? >> It's a lot of factors.

Even though sports betting has been on. the rise in the United States for years. at this point, it's not legal. everywhere. There are states like. California and Texas where sports. betting is banned. I spoke with the. attorney general of Utah where gambling. is outlawed in the state constitution. And so some of these states just want. nothing to do with betting of any kind. They want to get rid of it entirely. >> Yeah, okay. >> There are other states where sports. betting is allowed, but there are. consumer protections built around it. that the state spent a lot of time. establishing. So, for example, sports.

betting is only legal if you're over the. age of 21. Well, on Kalshi you can bet. if you're over the age of 18 because. that's the rule governing financial. exchanges. So, there's an argument about. what the rules around sports betting, even in places where it's legal, should. look like. >> Got it. >> And then, I would say the third crucial. thing that the states are fixated on is. tax revenue. In states where gambling is. legal, the states collect, sometimes, billions of dollars in revenue as a. result of that activity. And that's.

revenue that they're not getting from. prediction market companies at the. moment. And that's obviously a source of. huge frustration for state leaders. >> Interesting. So, the states' ability to. collect tax revenue from these platforms. depends, it sounds like, on their. ability to regulate them. >> [clears throat]. >> Typically, yes. When the states started. regulating the gambling companies, they. created these frameworks that entailed a. tax, and that's been really valuable to. the states. And those frameworks don't. exist for prediction market companies, for the most part. And, as you can.

imagine, those sports betting companies. that worked so hard to get regulated in. the states, a lot of them are very. unhappy about what the prediction. markets are doing, and they think it's. totally unfair that they're paying. taxes, that they're having to comply. with all these rules, while companies. like Kalshi can kind of just march in. and do what they want. >> So, they're on the side of the states. here. They want the prediction markets. regulated just like them. >> Many [clears throat] of them are on the. side of the states, though there have. been some pretty high-profile examples. of these companies saying, "If we can't. beat 'em, join 'em." And there are big.

traditional sports books that are now. launching their own prediction markets. and kind of trying to take advantage of. the opportunity that companies like. Kalshi have identified. >> David, I just want to push on the idea. that the states regulating prediction. markets would actually rein them in. more. I mean, the states currently. regulate regular sports betting. companies, and it honestly seems as. though sports betting is absolutely out. of control right now. Like, if this is.

what it looks like for states to. regulate, it's not totally clear to me. what Kalshi and Polymarket have to fear. >> [snorts]. >> You're absolutely right, and one of the. arguments that the prediction market. companies make is wouldn't it be better. to have a single unified clear federal. regulatory regime instead of a patchwork. of 50 state rules that might be. confusing to people or contradict each. other or just be imperfectly executed. And that's a legitimate argument, I.

think. But at the same time, it's. clearly the case right now that the. federal regulator that's overseeing. prediction markets is heavily tilted. toward the side of these companies. And. that has caused people to say, you know, is this agency equipped to do this. really difficult job? Maybe in a future. administration it might be, but a lot of. people have concerns about the current. landscape. >> Right. I mean, this brings up this. question for me that I've had throughout. our conversation, which is. is it always a given, actually, that.

federal regulation of an industry like. this is less stringent? Or is that just. because the Trump administration has. installed, as you said, a deferential. head of this agency that is now. regulating them? If a future administration came in and. changed things, would the federal government potentially. be harsher than the states? >> I think that's entirely possible. The. one problem with that hypothetical is. that in the history of the CFTC, it has.

never been an aggressive regulator on. the level of something like the SEC. And. the question that a lot of critics of. this industry are asking is was this. agency ever set up to do something like. this? And I think that's a kind of. legitimate debate that you could have. even in a Democratic administration. The other issue at play here is one. that's been at the center of American. democracy from the very beginning. It's. this question of do the states have.

certain powers? Does the federal. government have certain powers? Who can. do what? And how that debate is. adjudicated in this particular case has. huge practical implications because. right now sports betting isn't legal in. every state. In fact, two of the most. populous states have outlawed it. And so. what's really at stake here is whether. people can actually engage in this. activity everywhere the way they have. been doing. >> Meaning. how pervasive these prediction markets. are and exactly how far their reach is.

across the country. >> Right. >> [music]. >> It would be naive to think that the. prediction markets were going to go away. entirely, that we could just roll back. time and suddenly they wouldn't exist. anymore. But the outcome of this court battle. will have a major impact on how. widespread this industry [music]. ultimately becomes. You may think that these companies are. already ubiquitous. You're seeing them. everywhere. They couldn't possibly get. bigger. But I promise you if these.

companies win this court battle, then. the kind of betting mentality that they. represent, the idea that everybody. [music] can bet on anything everywhere, will just get bigger and louder and more. widespread and more ingrained in how our. society [music]. functions. That could ultimately be where this is. going. >> [music]. >> Well, David, thank you so much for being.

here. >> Thanks for having me. >> [music]. >> We'll be right back. Here's what else you need to know today. >> [music]. >> On Monday, the Trump administration. finalized its plan to significantly. weaken fuel efficiency standards for.

[music] passenger vehicles. Under the new rules, car makers are. going to have 5 years to reach an. average fuel efficiency of 34.9 miles. per gallon for [music] new cars and. light trucks. That is far below the standard of 50.4. miles [music] per gallon that was set. under the Biden administration. President Trump cast the change as a way. to lower car prices, but critics said. that less efficient [music] vehicles. could cost consumers more at the pump in. the long run.

And. >> [music]. >> British counter-terrorism officials said. on Monday that the five men who had. earlier been arrested near an air force. base [music] were being released on. bail. It was an unexpected development after. officials initially said that the men. had been preparing to commit a terrorist. [music] act near the base, which is. primarily used by American forces. Their release raised new questions. [music]. about what exactly happened at the base, how the men managed to drive three. [music] vans so close to an area where.

American bombers are stationed, and. whether the British army had failed to. find any evidence. >> [music]. >> after examining the vehicles for more. than 24 hours. >> [music]. >> Today's episode was produced by Ricky. Newvetsky, Diana Wynn, Jack D'Isidoro, [music] and Adrian Hurst with help from. Eric Ruke. It was edited [music] by. Chris Hackel with help from Paige Cowett. and Devon Taylor. Contains music by.

Alicia Eatoop, Marion Lozano, and Diane. [music] Wong and was engineered by. Alyssa Moxley. Our theme music is by Wonderly. >> [music]. >> That's it for The Daily. I'm Natalie. Kitroeff. See you tomorrow. >> Mhm.