Category: Business

Prediction markets are rewriting the rules of American gambling.

These platforms have taken the country by storm, enabling users to stake money on the outcome of real-world events — everything from who will win a baseball game to the location of Taylor Swift’s wedding.

For users, prediction markets operate almost indistinguishably from online betting platforms. However, they are technically investment sites. As such, they are not constrained by state and tribal gaming law. They are available in all 50 states — even those with no gambling — and the prediction market companies pay no state taxes.

States have been fighting back. Twenty-six states are engaged in active litigation against prediction market companies, and several have passed increasingly creative laws attempting to restrict or remove them. Yet, most of these attempts have been thwarted by the Commodities Futures Trading Commission (CFTC), the federal regulator that oversees prediction markets. The Commission insists that, as investment platforms, companies like Kalshi and Polymarket need not concern themselves with state regulation.

The CFTC position reverses over a century of precedent in terms of how the federal government approached gambling policy. Throughout American history, gambling has generally been treated as a state issue. Where the federal government has intervened, it has been to protect states from gambling — even if doing so meant protecting states from themselves.

But the current CFTC has flipped this equation. A federal agency is doing its utmost to effectively nationalize gambling, leaving states powerless to control what has historically been under their domain.

The first federal foray into national gambling policy came in response to an interstate lottery scheme.

In the 1700s, lottery tickets were almost as easy to find in the U.S. as they are today. “Every part of the United States abounds in lotteries” a Boston newspaper observed in 1791.

Around the turn of the 19th century, however, the public soured on lotteries. A surge of religious fervor brought with it a wave of anti-gambling furor. By the late 1870s, only a single state licensed a lottery: Louisiana.

The Bayou State did not just run any lottery. The state government licensed its operation to an entity known as the Louisiana State Lottery Company, better known as “the Serpent” or “the Golden Octopus.” It came by these monikers honestly.

The LSLC was notoriously corrupt, having slithered its way to political invulnerability through bribes to state officials. The lottery, which nominally existed to raise money for a children’s hospital, actually lined the pockets of its proprietors on the back of $28 million in sales in 1890 alone (modern equivalent: $1.02 billion).

The Golden Octopus nickname was fitting for another reason: the Louisiana lottery’s tentacles reached well beyond the state’s borders. Operating through the U.S. mail, the LSLC sold roughly 90% of its tickets to residents of other states. The Golden Octopus filled the market void for people without other access to legal lottery tickets, becoming a de facto national lottery.

This created an uproar because other states were powerless to do anything to stem the tide of lottery tickets into their states. The Louisiana legislature was beyond their control, and it was impractical to crack down on every dreamer clutching a ticket or every piece of mail with a Louisiana return address.

In late 1890, President Benjamin Harrison condemned how the mail system overflowed with “fraudulent and demoralizing appeals and literature emanating from the lottery companies.”

The only body truly capable of slaying the Golden Octopus was Congress. It did so with bills in 1890 and 1895 that prohibited the mailing and interstate transportation of lottery tickets, advertisements or paraphernalia.

States could decide the question of lotteries for themselves, but other states could not decide the question for them. Congress overrode Louisiana’s state gambling law to protect gambling laws in the 43 other states.

The anti-lottery bills set a clear precedent — one that would be replicated almost exactly a century later, when congressional involvement in gambling even more clearly overrode state authority.

In the 1960s, states once again began operating lotteries. By the late 1980s, as states experimented with new lottery games, a few began considering sports pools. These were games in which players could attempt to predict the outcome of between three and 14 football or basketball games, with the payout dependent on the amount put up both by the bettor and by all other players.

The only trouble was that, to the professional sports leagues, these games represented a dangerous wedge that could open the door to legalized sports betting. At the time, the leagues were deeply opposed to all things gambling, viewing any association between it and their product as a threat to the integrity of American sports.

The leagues mobilized in multiple states to attempt to stamp out sports pools. But by going to Congress, they could pull the weeds out by the root. In 1992, Congress obliged, passing the Professional and Amateur Sports Protection Act (PASPA). The bill did not ban gambling. Rather, it banned states from legalizing sports gambling, leaving a few exceptions for states that had already authorized a form of betting, most notably Nevada.

Anyone who has watched a sporting event in the last eight years knows that PASPA did not last. In 2018, the Supreme Court overturned the bill on the grounds that, according to Justice Samuel A. Alito Jr.’s majority opinion, Congress had usurped state authority as enshrined in the Tenth Amendment: “A more direct affront to state sovereignty is not easy to imagine.”

Congress could regulate sports gambling. But in creating a patchwork set of rules that banned states from deciding the issue for themselves, it had gone too far in asserting authority over states’ rights. The decision has led to an explosion in online sports betting, with the major sports leagues now embracing gambling and integrating it into their telecasts.

A few years after legal sports betting took off, prediction markets endeavored to broaden the base of gambling options. Though the Biden administration tried to restrict them, the Trump White House has taken a different approach, authorizing the platforms to expand their offerings from bets on political events like elections to sports, pop culture and seemingly every imaginable topic. It has done so with the direct support of President Donald Trump, whose son, Donald Trump Jr. has financial stakes in both Kalshi and Polymarket.

For some states, the federal government has once again gone too far on gambling, this time in the opposite direction. Instead of prohibiting states from legalizing gambling, the CFTC has created a national system of de facto gambling in contravention of state and tribal gambling law.

One direct result is that while most states set the legal gambling age at 21, investment platforms are available to anyone over the age of 18, meaning the CFTC has effectively lowered the national age to legally bet.

The current CFTC rules are even more vulnerable than PASPA was. Because they’re regulations, not laws, a change in presidential administrations — and by extension, the leadership of the CFTC — could lead to an overhaul of the Commission’s approach to prediction markets. Additionally, passage of any one of the bipartisan bills that have been proposed in Congress to rein in prediction markets could swiftly constrain the experiment in federally-mandated gambling.

As history shows, gambling law is not forever. States have generally been left to decide for themselves how much gambling they want to offer, with the federal government setting a limit as it sees fit. Odds are that arrangement could return.

Jonathan D. Cohen leads gambling policy for the American Institute for Boys and Men. He is the author of Losing Big: America’s Reckless Bet on Sports Gambling. Made by History takes readers beyond the headlines with articles written and edited by professional historians. Opinions expressed do not necessarily reflect the views of The Inquirer.