Prediction markets like Polymarket and Kalshi have hit the headlines—not least because of their role in making some people filthy rich off the back of the Middle Eastern war. But they’ve also drawn the attention of legislators concerned about their growing prominence.
Many officials have privately raised concerns about platforms like Polymarket and Kalshi. Arizona’s attorney general has gone further, charging Kalshi with offering what the state alleges are illegal bets on election outcomes. “Kalshi may brand itself as a ‘prediction market,’ but what it’s actually doing is running an illegal gambling operation and taking bets on Arizona elections, both of which violate Arizona law,” said Kris Mayes, the state’s attorney general, in a statement.
At the same time, Sen. Chris Murphy and Rep. Greg Casar, both Democrats, have introduced the BETS OFF Act, which would ban wagering on government actions, terrorism, war, assassination, and events where an individual knows or controls the outcome.
The recent developments are “wild,” says John Holden, associate professor of business law and ethics at the Kelley School of Business at Indiana University. “This is the most aggressive we have seen a state be with going after any of the prediction market sites.” Gaming law specialist lawyer Daniel Wallach adds that “this represents a true inflection point.”
For Holden, what stands out is that Arizona is pursuing Kalshi under both general betting laws and specific prohibitions on election wagering. “Election wagering is something that many states prohibit via specific statutes,” he says. That approach could criminalize betting on elections, rather than relying solely on civil enforcement.
“This is clearly an escalation,” says Karl Lockhart, assistant professor of law at DePaul University. The strategy itself marks a shift. “Arizona, and actually a lot of states, have these laws that forbid people from gambling on elections,” says Lockhart. Using those statutes to argue that Kalshi cannot serve customers in the state is a novel attempt to rein in the platform. “Arizona is going to be the first to test this, to see if this election betting law approach works,” he says.
The companies’ expansion into a wider range of markets has helped regulators begin building a potential case against them—while also underpinning their rapid growth. In December, Kalshi was valued at $11 billion. But that diversification is also part of the companies’ defense. Lockhart says prediction market firms have broadened their offerings by arguing they are tied to real economic outcomes that users may want to hedge, from weather events to government decisions.
The goal, he suggests, is to avoid resembling traditional sportsbooks. “They don’t want to just be purely offering sports contracts, because then it seems very, very clear that this is just what they’re doing,” he says. By offering contracts on elections, policy outcomes, and other real-world events, the companies can argue they are something more expansive—and more financially legitimate—than gambling sites.
That argument has come under increased scrutiny alongside the BETS OFF Act. “Too often, prediction markets are becoming yet another place for rich and powerful people to cash in on insider information,” said Rep. Casar in a statement. “This bill will put a stop to that.” However, Wallach doesn’t believe this is going to be a perceived problem solved through legislation alone. “This battle over the legality of event contracts is going to be waged in the courts,” he says.
More broadly, Arizona’s approach marks a significant escalation in enforcement. “The criminal charges are a different approach from the civil litigation that has been going on in a seemingly ever-growing list of states,” says Holden. “Ultimately, however, it looks like the ends that the state is looking for would be roughly the same, stopping prediction market sites from serving customers in the state, if they are not licensed and registered through the same channels as other gaming companies.”
A Kalshi spokesperson said in a statement: “Sadly, a state can file criminal charges on paper-thin arguments. States like Arizona want to individually regulate a nationwide financial exchange, and are trying every trick in the book to do it.” (Polymarket did not respond to Fast Company‘s request for comment.)
If Arizona succeeds in applying criminal election-wagering statutes to a federally regulated prediction market, other states may follow. “There are a number of states that have these election wagering specific statutes,” says DePaul’s Lockhart. “So it will be interesting to see if there are other states that are willing to sort of take this escalating the stakes for Kalshi.” For now, he says, it is a “very, very interesting, quickly evolving situation.”