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

From The New York Times, I'm Natalie Kietrow-F. This is The Daily. Over the last year, America has witnessed the explosion of prediction markets, platforms like Kowshi and Polymarket, which allow you to wager on just about anything, from who will win a football game to the weather in New York City. But now, those hugely popular platforms are in the middle of a legal battle that could determine whether they get rained in, or whether betting on everything becomes the norm everywhere. Today, my colleague, David Yaffee Bellany, explains, "It's Tuesday, September 29. 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 in betting 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 in these products, and they've sort of become ubiquitous. Hey, have you heard about this prediction market, Kowshi? You can't turn on the TV and watch sports game without getting bombarded with a prediction market ad. With Kowshi, you can trade on anything. From culture to the weather. Unlike sports books, Kowshi doesn't set the odds. Other users do. There's a recent one with LeBron James. It's live trading. You gotta stand your tone. Morning, Eli. Good morning, LeBron. It's another recent one with Sydney Swini. Trading on sports. Tates 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 has sports betting season, and that's surely gonna lead to another burst in popularity and more money flowing into these platforms. But at the same time that all of this interest has surged, there have also been a succession of scandals around prediction markets. A U.S. Special Forces soldier who helped 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 on Kowshi by betting on what the president would say during his speeches. Remember, this is the guy running the prompter. For instance, there might be a prediction market question about, say, who's gonna attend the state of the union. And if you have confidential advance information about that, then you can bet based on it. This morning, a sources say disgraced former congressman George Santos is under investigation for possible insider trading on the prediction market Kelshi. 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 God. By skipping the speech, sources say he pocketed tens of thousands of dollars. Kelshi froze as a count, and it was worth it. He got caught and ended up having to pay a big fine, and it was the latest fun episode 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 and all that has been the states. And in particular, the state attorneys general who are the officials responsible for enforcing state laws 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 rained 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 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 state's the ability to regulate sports betting. And the state 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 their 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 sportsbooks. So traditional sportsbook, 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. And that can create some predatory incentives and how sportsbooks are run. The prediction 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 it's a pure-to-peer interaction as opposed to one that's run by this kind of centralized house that benefits when you lose. And also the markets take transaction fees. They're getting a cut of each of these bets. And so they make the point, we'll get our cut if you win or if you lose. We don't have a stake in your successor 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, 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 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. And I think the point there is the way that consumers interact with these platforms is no different than how they interact with sportsbooks. But CalShe says that actually users are using the platform in a different way. That users see it as fair 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 CalShe 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 protect them. text you from another possible outcome. - Like, give me an example. - One that CalShi 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 CalShi 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 CalShi 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 CalShi pay out. - Exactly, and CalShi 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 CalShi 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 CalShi or any of these platforms any differently than a fan duel or a draft Kings. They're going on 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 CalShi. - 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? - 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 of 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. But actually, the states do have a stake in regulating these platforms and should be allowed to do so. What that means is that 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 gonna 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. And that's the Trump administration and also the Trump family. - We'll be right back. Okay, David, how does President Trump and his family factor into all 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 CalShi 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. - Right. - 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's 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. 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 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, you said, a direct financial stake in. - Absolutely, Donald Trump Jr. technically isn't part of the administration, 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. - 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, I think the SEC qualified. 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 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 state judge ruled 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. 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 set 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 Calche, 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 state's ability to collect tax revenue from these platforms depends, it sounds like on their ability to regulate them. - Typically, yes. When the state started regulating the gambling companies, they created these frameworks that entailed attacks. 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 CalShe 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 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 them, join them, 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 CalShe 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. If this is what it looks like for States to regulate, it's not totally clear to me what CalShe and Polymarket have to fear. 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 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, 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 they're reaches across the country. Right. 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 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 can bet on anything everywhere will just get bigger and louder and more widespread and more ingrained in how our society functions. That could ultimately be where this is going. Well, David, thank you so much for being here. Thanks for having me. We'll be right back. Here's what else you need to know today. On Monday, the Trump administration finalized its plan to significantly weaken fuel efficiency standards for passenger vehicles. Under the new rules, car makers are going to have five years to reach an average fuel efficiency of 34.9 miles per gallon for new cars and light trucks. That is far below the standard of 50.4 miles 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 vehicles could cost consumers more at the pump in the long run. And British counterterrorism officials said on Monday that the five men who had earlier been arrested near an air force base were being released on bail. It was an unexpected development after officials initially said that the men had been preparing to commit a terrorist act near the base, which is primarily used by American forces. Their release raised new questions about what exactly happened at the base, how the men managed to drive three vans so close to an area where American bombers are stationed, and whether the British army had failed to find any evidence after examining the vehicles for more than 24 hours. Today's episode was produced by Ricky Novetski, Diana Wynn, Jack Dissedoro, and Adrian Hurst, with help from Eric Kruppky. It was edited by Chris Haxel with help from Paige Cowatt and Devon Taylor, contains music by Alisha But YouTube, Marion Luzano, and Diane Wong, and was engineered by Alissa Moxley. Our theme music is by Wonderly. That's it for the daily. I'm Natalie Ketrowath. See you tomorrow.