Prediction Markets Trigger Regulatory Scrutiny
Trevor John, co-founder of Underdog Fantasy, on the business model of fantasy sports
The real risk is not the prediction market product itself, but that it can cause regulators to reclassify a sportsbook’s whole operating posture. A company like FanDuel already holds state gaming licenses, runs sportsbook compliance, and depends on regulators trusting the boundaries of that business. If it adds a federally framed prediction market that looks and feels like sports betting, it invites scrutiny into whether the company is using a new wrapper to expand wagering beyond the spirit of its existing licenses.
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Prediction markets sit in a different regulatory lane from sportsbooks. Kalshi’s model runs under CFTC exchange rules, is available nationwide, and charges about a 1% fee, versus sportsbooks that rely on state approvals and typically earn a 4% to 5% hold. That gap is exactly why a sportsbook entering the category can look provocative to state regulators.
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There is a strategic advantage to keeping prediction markets off to the side. Standalone players like Kalshi and Polymarket can argue they are new financial venues. FanDuel cannot make that argument as cleanly, because regulators already know it as a gambling operator whose core product is sports wagering.
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This also explains why incumbents are cautious even as the category grows fast. Internal research on prediction markets shows sports has become the main source of volume, and broader ecosystem interviews point to FanDuel, DraftKings, Robinhood, Coinbase, and Fanatics all moving toward the space, but through separate venues, partnerships, or acquisitions rather than fully blending everything into the sportsbook brand.
The next phase is a separation strategy. Large gambling and trading platforms will keep entering prediction markets, but the winners will structure them as adjacent businesses with distinct licenses, brands, and infrastructure. That preserves nationwide upside while reducing the chance that one experimental product triggers a broader review of the core sportsbook franchise.