How prediction markets work, and why three regulators gave three different answers
Synopsis
Prediction markets turn views about future events into tradable contracts, but questions over whether they are financial markets or gambling have led regulators to different conclusions.
Kalshi and Polymarket have turned event contracts into a mainstream financial product in the United States. Australia looked at the same instrument and called it gambling. India has closed off both arguments. The mechanics are simple. The classification is not.
The contract
A prediction market lists a question with a checkable answer. Will the Reserve Bank hold the repo rate in December? Will a named party win a particular seat? Each contract settles at one dollar if the answer turns out to be yes and at zero if it does not. Prices trade in between, quoted in cents.
Buy at 30 and you are risking 30 cents to make 70. The event needs to happen more than 30 per cent of the time for that to break even before fees. This arithmetic is what people mean when they say the price is a probability. At 30 cents, the marginal buyer and the marginal seller have settled on roughly a three-in-ten chance.
Two features separate this from a bookmaker's ticket. There is no house: the platform matches buyers with sellers and charges a fee, so the price comes from order flow rather than from an operator managing its own book. And the position can be sold before expiry. A contract bought at 30 and sold at 60 pays out whether or not the event ever occurs, which makes it behave like a short-dated binary option.
Resolution is where the design gets awkward. Kalshi settles against sources named in the contract terms. Polymarket uses an oracle in which token holders vote on the outcome, which has produced disputes when the wording and the event fail to line up.
Whether the price is any good
The forecasting claim is that a market updates faster than a poll because someone has money riding on being early. The counter-argument is visible in the volume mix. Sports accounted for about 87 per cent of the USD 39.7 billion traded on Kalshi in the year to February 2026. Whatever these platforms aggregate in theory, by turnover they are sportsbooks.
Market integrity has proved harder than pricing. In April 2026 the Commodity Futures Trading Commission brought its first insider trading case involving event contracts, against a serving US Army officer alleged to have traded Polymarketpositions using classified military intelligence. Kalshi separately fined and suspended political candidates who had traded on their own campaigns. The structural problem is plain: where the traded object is information about an event, the person closest to the event has the best position, and the usual insider trading rules assume an issuer and a fiduciary duty that event contracts often lack.
United States: a derivative, pending appeal
Kalshi has held a designated contract market licence from the CFTC since November 2020. It self-certifies contracts, filing them as compliant so they go live unless the Commission objects. Self-certification is not approval, and the CFTC keeps the power to review or suspend a listed contract.
When Kalshi began listing sports contracts in January 2025, state gaming regulators pushed back. On 6 April 2026 the Third Circuit held that its sports contracts are swaps under the Commodity Exchange Act and that federal law pre-emptsNew Jersey's gambling statutes. The panel divided two to one, with Judge Roth writing that the products are barely distinguishable from what licensed sportsbooks already sell. State enforcement has carried on regardless. In July 2026 a Michigan court ordered trades by users in that state to be voided and refunded, which raised a question the exchange model does not answer easily: how do you unwind a contract that has already changed hands several times?
The Commission has meanwhile shifted to rulemaking. Its June 2026 proposal would define gaming and set out when a contract "involves" a prohibited activity by looking at what determines settlement. A contract on whether Iran initiates conflict in the Strait of Hormuz would involve war. A contract on oil volumes through the Strait would not, even though a war would move those volumes.
Australia: gambling, judged on how it behaves
The Australian Communications and Media Authority investigated Polymarket after reporting that it had paid local influencers to promote election markets during the 2025 federal campaign. Its finding was that the platform did not meet the criteria for a financial product under Australian corporations law. There was no investment mechanism and no risk management function. Users were staking money on binary outcomes and expecting to profit from being right. That put Polymarket inside the Interactive Gambling Act 2001 without a licence, and internet providers were directed to block it from 13 August 2025. Investigators had been able to open and fund accounts while stating they were in Australia, and traffic data showed close to 1.9 million Australian visits in the six months from November 2024.
The block settles less than it appears to. Kalshi has not been investigated and restricts Australian users under its own agreement rather than by order. Using a VPN is not an offence for an individual, because the Act targets operators. Australian markets kept trading through the Farrer by-election, drawing around USD 500,000 on Polymarket and close to USD 100,000 on Kalshi. In August 2026 ASIC warned that no prediction market holds an Australian market licence and that anyone using an offshore platform has little recourse if it goes wrong.
India: prohibited, with both defences closed
India had the industry before it had a position on it. Probo, MPL Opinio and SportsBaazi ran event contracts on cricket, elections and index levels while arguing that opinion trading is a skill-based information market rather than gambling. SEBI closed the financial-product route in April 2025, saying these platforms fall outside its purview, offer nothing that qualifies as a security, and should stop borrowing the vocabulary of trading.
The Promotion and Regulation of Online Gaming Act, assented in August 2025, closed the rest. It prohibits online money games outright, whether the underlying activity involves skill or chance, and reaches their advertising and payment rails. Probo suspended real-money operations within days. The Rules were notified on 22 April 2026 and the framework took effect on 1 May. MeitY wrote to VPN providers on 25 April about users reaching blocked platforms. Polymarket went dark for Indian users around 21 May, and Kalshi added India to its restricted list of 55 jurisdictions in June.
Then the courts settled the constitutional question. On 27 May 2026, in State of Tamil Nadu vs. Junglee Games, the Supreme Court held that once money is staked on an uncertain outcome the activity is betting and gambling whatever the skill content, that it is res extra commercium, and that no right to trade under Article 19(1)(g) attaches to it. The companion Gameskraft ruling upheld 28 per cent GST on the full face value of stakes, retrospectively, restoring demands the industry puts above INR 1.5 lakh crore. Review petitions went in during July.
The line everyone is looking for
Underneath three different answers sits one question: does a payoff contingent on an event have an economic purpose beyond the payoff itself? An airline hedging jet fuel has an exposure whether or not it trades. Someone buying a contract on a cricket result has an exposure only because they bought it. The CFTC's proposed rule is an attempt to write that distinction into a workable test. ACMA applied a version of the same test to how Polymarket actually functioned and reached the opposite conclusion. India did not reach the question at all, having ruled that staking money on uncertainty is the definition of the thing rather than a feature of it.
Three things will shape the next two years: whether the US Supreme Court takes up the swap characterisation, what the CFTC's final rule permits to be listed, and whether the constitutional challenge to PROGA now before the Indian Supreme Court disturbs any of what May settled.
At Inspirepreneurs Magazine, covering entrepreneurship, business failures, and the human stories behind the world's most ambitious founders. She writes at the intersection of strategy and storytelling.
