Trillion-Level Market Transformation: Is the Prediction Market Financial Innovation or Legal Gambling? The CFTC in the US Approves Amid State Law Challenges.

Prediction markets are rapidly transforming from a niche application of Crypto Assets into a serious financial infrastructure, yet their regulatory status remains unresolved. The lawsuit against Kalshi's NFL contracts by the state of Massachusetts highlights the significant gap between federal and state regulation, despite previously obtaining approval from the CFTC. Meanwhile, the Intercontinental Exchange (ICE) has made a substantial investment in Polymarket, bringing this event-driven trading into the mainstream financial spotlight. The industry is in a regulatory race, trying to define when speculation ends and financial innovation begins.

Regulatory Dilemma: The Conflict Between Federal and State Laws and the Necessity for a Unified Framework

There are serious differences in the definition of prediction market by US regulators, and the lack of a unified regulatory framework is becoming an obstacle to large-scale adoption by institutions.

· Conflict between CFTC and state laws: Massachusetts challenges Kalshi, classifying its approved NFL contracts as unlicensed gambling. Sentora's research director Juan Pellicer believes that investors should ultimately trust the federal CFTC framework, which takes precedence over derivatives and provides clarity nationwide.

· Urgent Need for Federal Guidance: Sportstensor CEO Leo Chan added that fragmented state-level rules have caused confusion in sports betting regulation, and consistent federal guidance is crucial for restoring clarity for platforms and participants. Both executives agreed that a unified regulatory framework is a prerequisite for institutional adoption.

Value and Trading Volume: Redefining the Metrics of Market Health

The trading volume of the prediction market is reaching new highs, but industry leaders are calling for the adoption of finer metrics to measure its economic value and risk transfer capability.

· Surge in trading volume: Dune data shows that the weekly trading volume of major prediction market platforms has exceeded 2 billion USD. Among them, Kalshi and Polymarket dominate, holding approximately 60% (1.3 billion USD) and 35% (773 million USD) of the market share, respectively.

· Questioning False Transactions: Critics point out that these figures include circular trading, which may exaggerate activity and do not transfer actual risk. Rachel Lin of SynFutures emphasizes, “Relying solely on trading volume does not reflect economic reality.”

· New Indicator Call: Lin suggested that the time-weighted open interest and net nominal settlement amount should be reported to demonstrate the real transfer of risk when the market resolves. At the same time, Pellicer also believes that the standardized disclosure of open interest, number of traders, and holding periods will enhance confidence and prove that these markets indeed transfer real risk.

Valuation and Future: The Potential to Disrupt Trillion-Dollar Traditional Derivatives

The valuation of the prediction market has sparked intense debate about its sustainability, but supporters argue that it has the tremendous potential to reshape the global flow of information and the trillion-dollar derivatives market.

· Valuation Controversy: Kalshi's valuation is approximately $2 billion, while Polymarket's valuation is reportedly as high as $9 billion to $10 billion. Pellicer believes these multiples are reasonable because Kalshi's annual trading volume has surged from $300 million last year to $50 billion, and the prediction market could disrupt the traditional derivatives market worth over $1 trillion.

· Long-term value: Chan believes that Polymarket's valuation reflects its potential to reshape global information flow, serving as a long-term bet on the monetization of collective foresight.

· Beyond traditional finance, Lin emphasizes that the true value of prediction markets lies in quantifying results that traditional finance cannot measure, such as policy decisions, technological breakthroughs, and geopolitical risks, which is what attracts institutional financial tools.

Global Outlook and Governance: Evolving Towards Trustworthy Risk Hedging Tools

To earn the trust of institutions, prediction markets must adopt institutional-level risk management, margin, and disclosure standards.

· Governance and Transparency: The International Monetary Fund (IMF) has warned that weak transparency and governance can amplify manipulation risks in financial markets. Pellicer suggests that prediction markets require margin adjustments for volatility, real-time position disclosures, and independent audits to transform from speculative tools into reliable hedging instruments.

· Global regulatory testbed: The European MiCA framework has yet to clearly define prediction markets, while new jurisdictions such as the UAE and Hong Kong are becoming testbeds for regulatory growth. Chan pointed out that the UK may be an ideal place to fill the policy gap and promote early adoption due to its balanced gambling laws and highly financialized culture.

Conclusion

Prediction market is at a crossroads, transitioning from the fringes of speculation to financial legitimacy. ICE's investments and CFTC's approvals signify the maturation of its infrastructure, yet legal fragmentation and governance risks remain. Its ultimate status — whether as financial innovation or gambling — will be shaped by regulation and trust. If transparency and oversight can keep pace with technological innovation, event contracts have the potential to evolve into a new category of risk pricing tools, fundamentally changing how investors and institutions manage uncertainty.

Disclaimer: This article is for informational purposes only and does not constitute any investment advice. The crypto assets market is highly volatile, and investors should make decisions with caution.