Original | Odaily Planet Daily (@OdailyChina)
Author | Azuma (@azuma_eth)
The booming prediction markets are now facing a real challenge.
On January 9, US local time, the Tennessee Sports Wagering Council (SWC) issued cease-and-desist orders to prediction market platforms such as Kalshi, Polymarket, and Crypto.com, demanding that these platforms stop offering sports event prediction contracts to residents of the state. The reason cited was that these companies were engaged in illegal gambling operations without obtaining a license from the state government.
In the notice, the SWC accused these three firms of illegally offering sports betting products under the guise of "event contracts." Although these platforms are registered with the U.S. Commodity Futures Trading Commission (CFTC) as designated contract markets, according to Tennessee state law, any entity offering sports event betting services in the state must hold a license issued by the SWC.
The SWC demanded that Kalshi, Polymarket, and Crypto.com cease all activities in the state by January 31, close open contracts, and refund resident deposits. Failure to comply by the deadline could result in civil penalties of up to $25,000 per violation and even criminal charges.
The Rapidly Growing Sports Betting Market
To understand why Tennessee is taking such a hard line against prediction market platforms, one must look at the current state of the US sports betting market.
Since the U.S. Supreme Court overturned the federal law prohibiting commercial sports betting, the Professional and Amateur Sports Protection Act (PASPA), on May 14, 2018, individual states have gained the authority to decide whether to legalize sports betting within their jurisdictions. Currently, sports betting in the US is regulated by state-level agencies responsible for licensing, compliance, and enforcement. Each state can set its own tax rates, market entry barriers, and responsible gambling requirements.
According to a report by the sports betting media Legal Sports Report, as of now, 38 US states (including Washington D.C. and Puerto Rico) have allowed the legal operation of sports betting services (both online and offline), with 30 states permitting online sports betting services — Tennessee is one of them and is the first state to allow only online sports betting while prohibiting physical betting venues.
Home to multiple popular leagues such as the NFL, MLB, NBA, and NHL, the US is undoubtedly a sports powerhouse, and sports betting is a gambling service clearly defined and heavily taxed by state governments.
Statistics from another major sports betting media, Sports Book Review (chart below, data as of August 2025), show that since the regulatory relaxation in 2018, the total betting handle (Handle) and tax revenue (Taxes) of the US sports betting market have shown astonishing growth over the past few years — the total market betting handle reached $148.74 billion in 2024, with tax contributions reaching $2.82 billion; in the first 8 months of 2025 alone, the total betting handle ($121.22 billion) and tax revenue ($2.68 billion) have nearly matched the full-year 2024 figures.
Focus on Tennessee: What Does Sports Betting Mean?
Now, let's focus on the protagonist of this incident, Tennessee.
In 2019, Tennessee passed the Tennessee Sports Gaming Act, formally legalizing sports betting. Although the then-Governor Bill Lee had reservations about gambling, he still allowed the bill to pass without exercising his veto power. Between 2021 and 2022, the Tennessee legislature passed laws establishing a dedicated regulatory council to be fully responsible for licensing and oversight. This council was initially called the Sports Wagering Advisory Council and later renamed the Tennessee Sports Wagering Council, the SWC that issued the cease-and-desist orders to Kalshi, Polymarket, and Crypto.com at the beginning of this article.
Currently, the SWC is Tennessee's sole sports betting regulatory body, responsible for operational licensing, compliance supervision, rule-making, and enforcement. The SWC stipulates that all sports betting providers must obtain a license from the SWC to offer services in the state. A total of 11 licenses have been issued so far (see chart above); only residents aged 21 and over can access related services, and they must pass geolocation verification to ensure bets are placed within the state; regarding taxation, the state levies a 1.85% tax on the total handle — an earlier scheme based on revenue was replaced in 2023 by taxation based on the total handle.
The sports betting market has contributed significant tax revenue to Tennessee. Statistics from Sports Book Review (chart below, data as of July 2025) show that in 2024, the total sports betting handle in Tennessee reached $5.268 billion, with tax contributions amounting to $97.16 million; in the first 7 months of 2025, the total handle has reached $2.4 billion, with tax contributions already reaching $56.4 million.
But this huge and still growing cake is now being gradually eroded by the likes of Polymarket.
How Are Prediction Markets Eroding the Old World?
On December 3, 2025, Polymarket announced that it had obtained CFTC approval to return to the US market after nearly four years; even earlier, Kalshi and Crypto.com's prediction market platform Truth Predict had already opened their doors to US users under CFTC approval.
The current regulatory situation is that sports betting is clearly classified as a gambling service, with regulatory authority belonging to the states, but prediction market platforms like Polymarket are generally regarded as new entities providing "event contract" trading services, and "event contracts" are considered financial derivatives in terms of asset nature, falling under the regulatory purview of the CFTC. This allows prediction markets to bypass the stringent regulations of gambling services — no need for state-level licenses, no need to follow addiction control and other user protection regulations, no need to pay high gambling taxes to the states; but at the same time, they can offer sports event outcome betting services similar to gambling,客观上 forming a certain "regulatory arbitrage."
If prediction markets were still just small experimental fields, it might be fine, but the fact is that the growth rate of prediction markets is even more outrageous than that of the already夸张 sports betting market — in 2025, the total trading volume of prediction markets was approximately $40 billion, an increase of about 400% from $9 billion in 2024. Data Dashboards compiled on Dune (chart below) show that sports-related event contracts have long become the category with the highest trading volume share in prediction markets.
The capital market has long sensed the growing threat of Polymarket to traditional sports betting services. Two giants of the sports betting market, DraftKings and Flutter Entertainment, recorded declines of 11.7% and 16.1% respectively over the past year — during the same period, the US stock market was in a bull market, with the Dow Jones rising 12.97% for the year, the Nasdaq up 20.36%, and the S&P 500 up 16.39%; and the size of the sports betting market continued its eight-year upward trend.
Whether it is Tennessee, which needs sports betting as a source of tax revenue, or the capital forces that actually control the sports betting market, it is difficult for them to agree to let prediction markets, this new player, come and share the pie.
Friction Is Not an Isolated Case; How Do Prediction Markets Fight Back?
In fact, Tennessee's ban on prediction markets is not an isolated incident. Maryland, Ohio, Illinois, New Jersey, Nevada, Montana, Michigan, and Connecticut have all cracked down on prediction markets for similar reasons. Since Polymarket only returned to the US market in December last year, Kalshi has borne the brunt of more regulatory impacts.
In response, Kalshi has filed lawsuits against three states — Nevada, New Jersey, and Maryland — on the grounds that it "has complied with higher-priority federal regulations and does not need to comply with state-level regulations." However, the results have not been ideal.
- The lawsuit in Nevada was the first to proceed. The district court initially supported Kalshi, but then turned around and ruled against Kalshi last November. Judge Andrew Gordon determined that sports-related event contracts on Kalshi were very similar to sports betting wagers and therefore fell under the regulatory scope of Nevada's gambling laws. Kalshi has appealed to the U.S. Court of Appeals for the Ninth Circuit;
- In New Jersey, the district court sided with Kalshi, but the state's gaming regulatory agency has appealed to the U.S. Court of Appeals for the Third Circuit;
- In Maryland, the district court sided with the gaming regulatory agency. Judge Judge Adam B believed that Kalshi failed to prove that "Congress has clearly and manifestly intended to deprive states of the power to regulate gambling." Kalshi has appealed this 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 at the appellate court level, which will lay the groundwork for the Supreme Court to resolve this issue in the coming years... If the appellate courts happen to consistently support Kalshi's position, other prediction markets might emulate its model and proceed with similar businesses before the Supreme Court hears the case; but if the appellate courts reach different conclusions, companies in similar situations may wait for clearer legal signals before taking action. In any case, Kalshi's lawsuit will create a precedent with direct and profound implications for the national sports betting and gambling industry.
In summary, whether prediction markets need to follow state gambling regulations remains an unresolved issue for now. The fundamental contradiction of this issue lies in the similarity of the products and services offered by prediction markets and sports betting, and the differences in regulatory requirements.
This is a tug-of-war over institutional adaptation. Before the appellate courts or even the Supreme Court give a final ruling, the gray area between prediction markets and sports betting will persist for a long time, and regulatory conflicts will be hard to avoid. In the short term, states will likely continue to defend their regulatory authority and tax base through enforcement and litigation; while prediction market platforms will try to use federal compliance and innovation narratives as a shield to fight for more living room.
Recommended Reading:
《Why Prediction Markets Are Truly Not Gambling Platforms》
