Original Title: "Touched the Qilian Cake of Gambling Industry, Prediction Markets Are Being Pursued by the Old Order"
Original Author: Azuma, Odaily Planet Daily
The rapidly rising prediction markets are now facing a real challenge head-on.
On January 9th, local time in the United States,The Tennessee Sports Wagering Council (SWC) has issued a ban against prediction market platforms such as Kalshi, Polymarket, and Crypto.com, ordering them to stop offering sports prediction contracts to residents of the state, citing that these companies are operating an illegal sports betting business without state licensing.
In the notice letter, SWC accused the three companies of illegally offering sports betting products under the guise of "event contracts." Although these platforms have already been registered with the U.S. Commodity Futures Trading Commission (CFTC) as designated contract markets, Tennessee state law requires any entity providing sports betting services within the state to hold a license issued by SWC.
The Securities and Exchange Commission (SEC) has required Kalshi, Polymarket, and Crypto.com to cease all activities within the state by January 31, revoke open contracts, and refund deposits made by residents. Failure to comply in a timely manner could result in civil penalties of up to $25,000 per violation, or even criminal charges.
The Rapidly Growing Sports Betting Market
To understand why Tennessee has taken such a strong stance against prediction market platforms, one must first look at the current state of the sports betting market in the United States.
Since the U.S. Supreme Court overturned the federal law known as the Professional and Amateur Sports Protection Act (PASPA)—which had previously prohibited sports betting—on May 14, 2018, states across the United States have gained the authority to independently decide whether to legalize sports betting within their jurisdictions.Currently, sports betting in the United States is licensed, regulated, and enforced by state-level authorities in each state. Each state can independently establish its tax system, market entry requirements, and responsibility standards.
According to the sports betting media outlet Legal Sports Report, as of now, 38 U.S. states (including the District of Columbia and Puerto Rico) have legalized sports betting services (both online and in-person). Among these, 30 states allow online sports betting—Tennessee is one of them. It is also the first state to permit only online sports betting and to prohibit physical sports betting venues.
As the home of multiple major leagues such as the NFL, MLB, NBA, and NHL, the United States is undeniably a sports powerhouse. Sports betting is a gambling service that state governments in the U.S. clearly define and heavily tax-regulate.
According to statistics from another major sports betting media outlet, Sports Book Review (see the chart below, data as of August 2025), since the regulatory restrictions were lifted in 2018, the total betting volume (Handle) and tax revenue (Taxes) in the U.S. sports betting market have experienced remarkably rapid growth in recent years. In 2024, the total betting volume reached $148.47 billion, with tax revenue amounting to $2.82 billion. In 2025, just the first eight months saw a betting volume of $121.22 billion and tax revenue of $2.68 billion, already approaching the full-year 2024 levels.
Focusing on Tennessee, what does sports betting mean?
Now, let's focus our attention on the main character of this event, the state of Tennessee.
In 2019, Tennessee passed the Tennessee Sports Gaming Act, officially establishingLegalization of sports bettingAt that time, Governor Bill Lee, although holding reservations about gambling, allowed the bill to pass without using his veto power. Between 2021 and 2022, the Tennessee General Assembly passed legislation establishing a dedicated regulatory commission to oversee licensing and regulation comprehensively. This commission was previously known as the Sports Wagering Advisory Council and was later renamed the Tennessee Sports Wagering Council, which is the SWC that issued the injunction against Kalshi, Polymarket, and Crypto.com mentioned at the beginning of this article.
Currently, the SWC is the only sports betting regulatory authority in Tennessee, responsible for operating licenses, compliance supervision, rulemaking, and enforcement. The SWC stipulates thatAll sports betting service providers must obtain a license from the State Gaming Commission (SWC) in order to launch services within the state. Currently, a total of 11 licenses have been issued (as shown in the image above). Only residents who are at least 21 years old can access these services, and they must pass a geolocation verification to ensure that bets are placed from within the state. In terms of taxation, the state imposes a 1.85% tax rate based on total betting handle. Previously, a tax based on revenue was applied, but this was changed in 2023 to a tax based on total betting volume.
The sports betting market has contributed significant tax revenue to Tennessee. According to statistics from Sports Book Review (see the chart below, data as of July 2025),The total amount wagered in Tennessee's sports betting market in 2024 reached $5.268 billion, with tax contributions amounting to $97.16 million. For the first seven months of 2025, the total amount wagered has reached $2.4 billion, with tax contributions reaching $56.4 million.
But this huge and still-growing cake is now being gradually eroded by platforms like Polymarket.
How do prediction markets erode the old world?
On December 3, 2025, Polymarket announced that it had obtained a CFTC license and would re-enter the U.S. market after nearly four years. Earlier, Kalshi and Truth Predict, a prediction market platform under Crypto.com, had already opened their services to U.S. users under CFTC licensing.
The current regulatory landscape is such that sports betting is clearly classified as a gambling service, with regulatory authority residing at the state level. However, prediction market platforms like Polymarket are generally regarded as new entities offering "event contracts" trading services. These "event contracts" are considered financial derivatives in terms of their asset nature, falling under the regulatory jurisdiction of the CFTC (Commodity Futures Trading Commission).This allows prediction markets to bypass the strict regulatory restrictions on sports betting services—without needing state licenses, without complying with user protection regulations such as those related to addiction control, and without paying the high sports betting taxes to states. At the same time, they can still offer betting services on sports event outcomes similar to traditional sports betting, objectively creating a certain form of "regulatory arbitrage."
If prediction markets were still just small-scale experiments, it would be one thing, but the reality is that the growth rate of prediction markets is even more astonishing compared to the already remarkably fast-growing sports betting market—In 2025, the total transaction volume of the prediction market is expected to reach approximately $40 billion, representing a roughly 400% increase from the $9 billion in 2024. According to data dashboards compiled by Dune (see the chart below), event contracts related to sports have already become the category with the highest share of trading volume in prediction markets.
The capital market has long sensed the growing threat that Polymarket poses to traditional sports betting services.The two major giants in the sports betting market, DraftKings and Flutter Entertainment, recorded declines of 11.7% and 16.1%, respectively, over the past year.Meanwhile, U.S. stocks were experiencing a major bull market, with the Dow Jones Industrial Average rising 12.97% for the year, the Nasdaq Composite gaining 20.36%, and the S&P 500 Index increasing by 16.39%. Additionally, the sports betting market continued its eight-year upward trend in size.
Whether it is Tennessee, which relies on sports betting as a source of tax revenue, or the capital forces that actually control the sports betting market, it would be difficult for them to agree to a new player entering the market to share the profits.
Friction is not an isolated case. How can we predict how the market will respond?
In fact, Tennessee's ban on prediction markets is not an isolated case.Maryland, Ohio, Illinois, New Jersey, Nevada, Montana, Michigan, and Connecticut have all previously cracked down on prediction markets for similar reasons.However, since Polymarket only returned to the U.S. market in December last year, Kalshi has directly borne the brunt of more regulatory impacts.
In response to this,Kalshi has filed lawsuits against three states, including Nevada, New Jersey, and Maryland, citing that it has already complied with higher-priority federal regulations and is therefore not required to comply with state-level regulations., but the results were not satisfactory.
The litigation in Nevada was the first to move forward. Initially, the district court had once supported Kalshi, but later in November of last year, it ruled against Kalshi. Judge Andrew Gordon determined that Kalshi's contracts on sports-related events were very similar to sports betting, thus falling under the regulatory jurisdiction of Nevada's sports betting laws. Kalshi has since appealed to the U.S. Court of Appeals for the Ninth Circuit.
• On the New Jersey side, the state's district court has supported Kalshi, but the state's sports betting regulatory agency has filed an appeal with the U.S. Court of Appeals for the Third Circuit.
In Maryland, the state district court ruled in favor of the state's request regarding sports betting regulation. Judge Adam B. held that Kalshi had not demonstrated that "Congress clearly and unmistakably intended to preempt the states' authority to regulate gambling." Kalshi has since appealed to the U.S. Court of Appeals for the Fourth Circuit.
The law firm Benesch commented on this, stating that...As the national debate continues, similar divisions are expected to emerge at the appellate court level, laying the groundwork for the Supreme Court to resolve the issue in the coming years.If the appellate court happens to unanimously support Kalshi's position, other prediction markets may emulate its model and proceed with similar operations before the case reaches the Supreme Court. However, if the appellate court reaches a different conclusion, companies in similar situations may likely wait for clearer legal signals before taking action. In any case, Kalshi's lawsuit will establish a precedent that has a direct and far-reaching impact on the national sports betting and gambling industry.
In summary, whether prediction markets need to comply with state-level sports betting regulatory laws remains an unresolved issue for now.The fundamental contradiction lies in the similarities between product service providers in predicting markets and sports betting, as well as the differences in regulatory requirements.
This is a tug-of-war concerning regulatory adaptation. Before the appellate courts and even the Supreme Court deliver their final rulings, the gray area between market predictions and sports betting will likely persist for a long time, and regulatory conflicts will be hard to avoid.In the short term, states may continue to defend their regulatory authority and tax base through enforcement actions and litigation; meanwhile, marketplace platforms are likely to use the narrative of federal compliance and innovation as a shield to secure greater room for survival.
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