Prediction markets are not new but their rapid expansion over the past two years has pushed them into largely uncharted regulatory territory, according to a report by Clear Street analyst Owen Lau. The sector’s explosive growth in 2024 and 2025 has shifted investor focus away from demand and toward a more fundamental question: how regulation will ultimately define which platforms can scale. Once a niche product, event contracts tied to elections and sports entered the mainstream in 2024, bringing real liquidity, institutional participation and broader consumer relevance. As volumes surged in 2025 prediction markets began to resemble early-stage crypto —innovative, fast-growing, and operating in a regulatory gray zone. In 2026, prediction models will be used to collectively decide what is true and what is not [true] and as a guide for fact-checking, analysts say. #Polymarket #Kalshi #PredictionMarkets #BTC https://t.co/fkQeRz28Qs — Cryptonews.com (@cryptonews) December 30, 2025 Federal vs. State Authority at the Core At the heart of the debate is a jurisdictional conflict between federal and state authorities. The key question is whether the Commodity Futures Trading Commission has federal preemption over sports-related event contracts, or whether states retain authority to regulate them as gambling activities. Clear Street notes that this mirrors the long-running dispute in crypto over whether digital assets fall under the remit of the Securities and Exchange Commission or the CFTC. Under the Biden administration, that lack of clarity slowed institutional adoption in crypto—an outcome prediction markets may now face. States have already taken aggressive legal action against platforms while the CFTC has largely deferred to the courts on defining what constitutes “gaming.” The stakes are significant: roughly $400 billion in annual trading volume and an estimated $4 billion in potential state tax revenue. Clear Street believes the majority of current activity is concentrated in sports-related contracts, though that mix could evolve as new use cases emerge. Divergent Court Rulings Add Uncertainty So far, three major cases—KalshiEX LLC v. Hendrick, KalshiEX LLC v. Flaherty, and KalshiEX LLC v. Martin—have produced mixed outcomes. Judges in Nevada and Maryland sided with state authorities while a New Jersey judge ruled in favor of Kalshi. Appeals are ongoing, and market consensus suggests the issue may ultimately reach the U.S. Supreme Court. Clear Street cautions that relying on court rulings alone is unlikely to provide durable clarity. As seen in crypto judicial decisions tend to be narrow and reactive rather than establishing a comprehensive framework. The Case for Legislative Action The report argues that long-term growth will likely require proactive lobbying and new legislation to create predictable rules. Beyond jurisdiction issues such as disclosure standards and susceptibility to manipulation—particularly in niche or thinly traded markets—must be addressed. Until then, the industry operates under what Clear Street describes as a “sword of Damocles,” with regulatory risk hanging over future expansion. Despite the uncertainty the firm views prediction markets as an incremental opportunity for listed crypto-exposed companies like Coinbase and Circle, assuming a clearer regulatory path eventually emerges. The post Prediction Markets Face Regulatory Crossroads as Legal Battles Intensify appeared first on Cryptonews .
