Prediction markets, platforms where people trade on the outcomes of future events, are experiencing a significant surge in popularity and are moving toward mainstream adoption. How exactly do these markets work, are they legal, do they constitute gambling and should they be regulated to ensure there are protections in place for those who might become addicted?
What are prediction markets?
A prediction market or betting market is an exchange-traded market where individuals can bet on the outcome of a variety of events with an unknown future. These events can involve elections, financial markets (such as whether or not the S&P 500 index will close above a specific level by year end), sports (such as whether a specific football team will win the Super Bowl) or even pop culture (such as whether a specific film will win the Academy Award for best picture). They just have to involve “yes or no” questions that will be resolved by a specific date.
Prediction markets run on a type of financial instrument known as an event contract. An event contract has a nominal value — often $1 — and traders can buy “yes” or “no” positions on it for some fraction of that value. When the event happens, the contract pays out to whoever was right.
For example, an event contract could involve whether Candidate A or Candidate B will win an election. If a trader buys a “yes” position on a Candidate A for 25 cents, and Candidate A ultimately does win the election, the trader would earn $1. But if the trader were wrong and Candidate B won, they’d get nothing and would lose their 25 cents.
From a larger perspective, prediction markets are based on the principle that aggregating the predictions of many individuals can lead to more accurate forecasts than relying on a single expert, opinion or poll.
Do prediction markets constitute gambling?
While there are various legal arguments opining on whether prediction markets constitute gambling or not, the perspective of the National Council on Problem Gambling (NCPG) is that it doesn’t make a significant difference. “From a problem gambling standpoint, anyone can develop an addiction to this activity, just as they can develop an addiction in legalized gambling markets,” says Cole Wogoman, director of government relations and league partnerships with NCPG.
The need for problem gambling safeguards
“Putting aside whether futures legally constitute gambling, from a problem gambling standpoint, betting on futures is functionally gambling,” says Cole. “The line between purchasing futures and gambling has particularly blurred with markets offered related to sporting events. NCPG is concerned about a form of gambling taking place outside of the responsible gambling tools framework and problem gambling safeguards required by gambling regulators.”
The legality of prediction markets
The legal status of prediction markets is complex and subject to ongoing debate. Historically, regulators have generally taken a firm stance against unlicensed online betting platforms. The central question is whether prediction markets, especially those involving sports outcomes, fall under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC) or are also subject to state gambling laws. If prediction markets are not regulated, there will be no protections for consumers.
“Our position is that the CFTC needs to regulate prediction markets so they’re on a par with other legalized forms of gambling and offering the related protections that state and tribal regulators provide,” says Cole. Otherwise, Cole says, the CFTC should not allow these markets.
The issue is particularly concerning to tribes and gambling regulators. “If prediction market activity is allowed without any regulation, it renders the efforts of those who have worked to provide protections for legalized gambling essentially meaningless if people can avoid all the laws already in place,” says Cole. Prediction markets also do not pay any gambling taxes like legalized gambling markets, and therefore do not contribute to funding used to prevent and treat gambling addiction.
Stay tuned as we track continuing developments with regard to prediction markets and NCPG’s efforts to ensure there is appropriate oversight of these potentially dangerous transactions.