Kalshi and other prediction markets have effectively opened the door to nationwide sports betting -- depending on your definition of a bet. By Nick Devor

A year ago, sports gamblers in Texas, California, and 15 other states were left out of the $2.7 billion in National Collegiate Athletic Association tournament bets. This year, technology firms are giving all 50 states a chance to get in on the action.

New York City-based Kalshi has invited users to "Make $ on March Madness" using its nascent prediction market platform. Kalshi customers placed $208 million worth of trades during the first two rounds of NCAA tournament games, the company says.

That's pocket change in the face of the broader March Madness gambling ecosystem, but it represents a seismic shift in the sports betting landscape.

Historically, online sports gambling has been tightly regulated in the 33 states where it's legal. By using federally regulated "event contracts," prediction platforms have effectively opened the door to nationwide sports betting. Kalshi's targeted social media ads prominently state: "Legal in California" and "Legal in Texas."

There's more than just gambling winnings at stake: States collected some $1.8 billion in revenue from sports betting taxes in fiscal 2023, up from just $79 million in 2019, according to the Tax Foundation. The prediction markets could threaten that fast-growing revenue stream.

Compared to the money lines, odds, and jargon tied to traditional sports betting, prediction markets are relatively simple. Event contracts -- also known as binary options -- are based on yes/no questions like "Will Duke win?" If the odds are 55% in Duke's favor, the "yes" side of the contract costs 55 cents and is worth $1 with a Duke victory. A "no" bet would cost 45 cents, and pay out $1 with a loss.

Kalshi calls its event contracts "truth discovery tools." There's debate about whether those tools constitute gambling.

In a February ad promoting Super Bowl contracts, Kalshi called itself the "first app for legal sports betting in all 50 states." It has since qualified that statement: "The 'bet' language is only used in the sense that any financial position can be considered a 'bet' on the future," Kalshi told Barron's. "Fundamentally, though, contracts on Kalshi are entirely distinct from sports bets."

The gambling industry has a different view. "The reality is that this effort amounts to a backdoor for national sports betting that threatens state authority, consumer protections and the integrity of the legal sports betting industry," Bill Miller, CEO of the American Gaming Association, wrote in a recent op-ed.

Prediction markets were originally designed to help investors hedge against events that could dent their portfolio; in November, a trader who feared investment losses in the event of a Kamala Harris victory could have bought event contracts that paid out if she won. Traders concerned about an economic downturn can buy the "yes" side of a Kalshi contract that asks "Recession in 2025?" (39% chance).

Kalshi's contracts now include a range of potential events: "Will a third Mamma Mia movie be announced before 2026?" (59% chance). "Will there be a One Direction reunion this year?" (22% chance).

The prediction-market business has been growing since the final stretch of the 2024 presidential election after a U.S. appeals court upheld Kalshi's right to offer event contracts based on political events. In the weeks leading up to Election Day, digital billboards displaying live election odds appeared in Chicago outside the Democratic National Convention and inside subway cars beneath Manhattan, where Kalshi is headquartered.

In December, online trading platform Crypto.com started offering sports event contracts. Kalshi debuted event contracts based on the Super Bowl soon after, and Robinhood partnered with Kalshi to offer Super Bowl contracts on its retail brokerage app.

The Commodity Futures Trading Commission, the U.S. derivatives regulator, has since launched a 90-day review of Crypto.com's sports events contracts.

Dustin Gouker, a longtime gambling industry analyst, doesn't see a return to the status quo.

The CFTC forced Robinhood to pull its Super Bowl contracts as part of a standard review for new products. "But now we're back for March Madness, and it's all green lights," Gouker says. "That tells me that, at least with a wink and a nod, CFTC has said this is OK."

Kalshi has powerful political allies. President Donald Trump's son, Donald Trump Jr., joined Kalshi as a strategic advisor in January. And Brian Quintenz, Trump's pick to chair the CFTC, is a former Kalshi board member. Quintenz, who served as a CFTC commissioner during Trump's first term, has previously said prediction markets don't constitute betting: "It is not the case that trading an event contract with a binary outcome is automatically considered a bet, wager, or gamble from a regulatory perspective," he said in March 2021.

The CFTC's 90-day review period ends in mid-April, with a separate roundtable discussion set for later in the month. The commission declined to comment on its review.

Meanwhile, there's money to be made. Gouker says the attitude among prediction markets is "let's move fast, let's just keep doing it, say it's super, 100% legal, and by the time you get so big, is anyone going to stop it?"

Some states have begun to try. The Nevada Gambling Control Board has told Kalshi that its offering of sports event contracts "is unlawful in Nevada, unless and until approved as licensed gaming by the Nevada Gaming Commission. It ordered Kalshi to cease operating in the state by March 14.

For now, Kalshi has received an extension. The Nevada gambling board didn't address questions from Barron's.

This week, Massachusetts' Secretary of State William Galvin subpoenaed Robinhood in an investigation into its event contracts. Robinhood sees its event contracts as a federal matter. "Event contracts offered by Robinhood Derivatives are regulated by the CFTC and offered through CFTC-registered entities," a Robinhood spokesperson told Barron's.

Last week, Robinhood, working with Kalshi, rolled out March Madness event contracts to its 26 million customers. Robinhood shares jumped 8% on the news. The app allows users to scroll through the tournament brackets and choose which games to put money on.

Interactive Brokers, a Robinhood rival, has been offering event contracts since August but is holding off on sports pending further guidance from the CFTC, says Steve Sanders, the firm's executive vice president of marketing and product development. More generally, the company is excited about the promise of prediction markets. "We're putting all our resources into this," Sanders says.

Jeff Ifrah, an attorney whose firm has advised online gambling operators on event contracts, says the online sportsbooks are paying attention too.

In July, DraftKings registered a new business, DraftKings Predict, with the National Futures Association.

The company sees more opportunity than threat, CEO Jason Robins told investors at a Morgan Stanley conference this month. It's also waiting for CFTC signoff. "If there is an opportunity that presents itself, we want to make sure we're prepared for it," he said.

Rival FanDuel, owned by Dublin-based Flutter Entertainment, sounds less excited about prediction markets, for now. "It could be an interesting opportunity, but I think it's worth recognizing that the products themselves lack the richness of a true sportsbook offering," Flutter CEO Peter Jackson said on a recent earnings call.

DraftKings and FanDuel declined to comment to Barron's.

"I fully expect that by the time the NFL season kicks off and certainly before next year's Super Bowl, we are going to see a handful of current sports betting operators offering CFTC regulated products," Ifrah says.

Write to nicholas.devor@barrons .com

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March 28, 2025 21:30 ET (01:30 GMT)

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