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In just eight short years, sports gambling has gone from an illegal enterprise in the United States to a booming business that processes $220 billion worth of bets each year. This weekend alone, some $1.8 billion is set to be wagered on the Super Bowl.

The rapidly expanding pot of money at stake has stoked fierce competition among sites like FanDuel, DraftKings and BetMGM to take bets on everything from which country will capture the most medals at the Winter Olympics to who will win the Masters golf tournament.

But the traditional gambling companies are facing formidable new challengers for their betting handle in the form of prediction markets like Kalshi and Polymarket, which by one estimate siphon off about $8 billion worth of wagers from sportsbooks each year.

Now the turf battle has turned into a legal brawl over what, exactly, counts as sports gambling.

Kalshi and Polymarket argue that bets made through their apps are different from bets made at a casino, and therefore their businesses are not subject to gambling taxes or regulations. After a federal ban on gambling was effectively lifted by a Supreme Court decision in 2018, the choice of whether to legalize sports gambling was left up to each state.

So far, 39 states and Washington, D.C., have made gambling on sports legal. Traditional sports betting, even on apps like DraftKings, is available only to bettors in those markets. But prediction-markets sites allow people to bet even in states that haven’t legalized betting on sports. That’s one reason that gambling apps have added their own prediction-markets products.

State gambling commissions, attorneys general and customers have responded to the claims that prediction markets operate under different rules with a wave of lawsuits. At least 20 federal lawsuits in more than seven states have been brought against prediction markets over sports betting, including a class-action lawsuit filed this past week against Polymarket by one of its users in New York.

On Monday, New York Attorney General Letitia James urged consumers to avoid using prediction markets to bet on the Super Bowl, writing in a statement that “many operate as unregulated gambling.” (In October, the prediction market Kalshi sued New York’s gambling regulator after it accused the company of operating as an unlicensed sports wagering operation.)

As court battles play out, the gambling industry has lobbied hard to shut prediction markets down. The American Gaming Association, an industry lobbying organization, along with the Indian Gaming Association, sent a letter to Congress last month urging legislators to address prediction markets that “are indistinguishable from legal sports betting.”

The AGA has also published a calculator that it says shows how much state tax revenue has been lost because bets were made on prediction markets (by its count, more than $400 million so far).

Prediction-markets companies are vying for political influence as well. In December, a group that includes Kalshi, as well as trading app Robinhood and crypto platform Coinbase, which have recently added prediction markets to their apps, created a lobbying organization called the Coalition for Prediction Markets. Kalshi appointed Donald Trump Jr. as a strategic adviser early last year, and Thursday announced new checks on bad behavior like insider trading and market manipulation.

The two sides have been trading verbal jabs, too. After Polymarket CEO Shayne Coplan said regulated sportsbooks were a “scam,” DraftKings cofounder and CEO Jason Robins told The New York Times: “We always prefer when people take the high road and don’t bad mouth us, but I’ve been doing this for a long time, and it’s just the nature of it.”

A difference of regulator

Popular prediction markets provide a platform for users to create, and wager on, event-based contracts — futures, essentially. Unlike a casino, they don’t take the other side of their users’ bets, so they don’t win when their users lose.

They are regulated by the federal Commodity Futures Trading Commission, rather than state gambling commissions, which oversee brick-and-mortar casinos like MGM as well as online sportsbooks like DraftKings.

Prediction markets argue that their federal regulator preempts any state laws. “There’s a century of federal regulation at the CFTC that is really good and trustworthy and can be relied on,” said Sean Maloney, a former Democratic congressman who leads the Coalition for Prediction Markets.

The CFTC has recently thrown its support behind prediction markets, with its chair, Michael S. Selig, saying last month that the agency “has the expertise and responsibility to defend its exclusive jurisdiction” over the type of event contracts offered by prediction markets.

Selig also withdrew a Biden-era rule proposal that would have banned prediction markets from offering political and sports-related events contracts.

Ongoing cases

Challenges to sports prediction markets have won early victories. In November, a federal judge in Nevada blocked Kalshi from offering sports contracts in the state, writing that the company’s interpretation of sports-related wagers “upsets decades of federalism regarding gaming regulation.” (The litigation is currently paused while Kalshi’s appeal to the 9th U.S. Circuit Court of Appeals is considered.) The state’s gaming regulator won a temporary restraining order against Polymarket last month.

Also last month, the Massachusetts attorney general, Andrea Joy Campbell, secured a preliminary injunction in her lawsuit against Kalshi, claiming that if the company wants to offer sports-related wagers in Massachusetts, it “must play by our rules — no exceptions.” (It, too, has been delayed.)

Ohio, whose casino control commission sent a cease-and-desist letter to Kalshi in October, cited the Massachusetts ruling in its ongoing lawsuit with the company.

Uneven stakes

Losing out on sports betting could be devastating for prediction markets. Kalshi’s own data shows that $12.5 billion of its total trading volume comes from sports-related contracts, compared to $4.7 billion for all other categories combined. About 90% of the transaction fees it collects comes from sports events.

In November, Kalshi warned that halting its sports prediction markets in Massachusetts alone would require it to liquidate $650 million in open derivative contracts.

The gambling industry may have less to lose. Chad Beynon, a senior analyst at Macquarie Group, told the Times that the threat prediction markets pose to sportsbooks is overblown. “The product is inferior,” Beynon said, noting that bettors cannot engage in parlays and in-play bets, which have become the most popular features of traditional sports betting and which account for roughly 30% of all bets placed.

Moreover, the vast majority of sports-related wagers on prediction markets come from states that do not have legalized sports betting, like Texas and California. Although some volume is being siphoned from sportsbooks to prediction markets, Beynon said, it’s not enough to do serious damage to the bottom lines of big players like DraftKings and FanDuel.

Along for the ride

The biggest winners could be apps that play both sides. At their onset, online sportsbooks such as DraftKings, FanDuel and Fanatics aligned themselves with casinos to better navigate state gambling regulations. In recent months, however, the online operators have dropped out of the AGA and started their own prediction markets.

In a statement, Fanatics, which was the first of the betting apps to create its own prediction market, Fanatics Markets, in early December, wrote: “While we respect the work that the A.G.A. does for the regulated gaming market, we have a difference of opinion on what that means when it comes to prediction markets.”

DraftKings was not far behind, starting DraftKings Predictions in 38 states. “We don’t want to be playing from behind,” said Robins, the DraftKings cofounder. “We’re not satisfied if we’re not doing a better job than our competitors and winning more share than our competitors.” As for leaving the AGA, Robins said there was a “lack of alignment” on prediction markets.

Online sportsbooks can also easily fall back on their core business model if the gaming industry, lawmakers and state attorneys general win their fight against prediction markets.

The real test will come if Democrats take back the White House and go after prediction markets, Beynon said: “These sportsbook companies want to be fast, they want to be active, they want to get a good return on what they’re spending right now, knowing that this could go away in 2028.”

This article originally appeared in .

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