Life in the gray: why gambling innovation stems from unregulated areas

Prediction markets are the latest in a long line of examples of how gambling innovation takes root in the gray areas.

Major prediction markets are embroiled in lawsuits across the country, with some states like Arizona banning some operators altogether. State governments argue that the services are sidestepping necessary gambling licensing laws, while prediction markets maintain they shouldn’t be subject to state-level regulation.

While there are some ways that prediction markets mimic traditional gambling, especially sportsbooks, there are also clearly ways that they are innovating. Traditional gambling operators wouldn’t offer so many entertainment or political bets – if any at all. Local betting shops don’t offer odds on what a tech CEO is going to say in the next all-hands meeting.

These types of off-the-wall bets are attracting a new crowd who wouldn’t typically be betting. Speaking to Sigma, CEO and founder of Yield Sec Ismail Vali noted that those under 30 are the most responsive to prediction markets and their current affairs-style event contracts.

“Under-30s don’t think they’re gambling,” he said. “They genuinely believe they’re predicting. Whatever that means, but it’s not gambling when it absolutely is.”

Gambling innovation has a long history of operating in the legal gray areas

Part of the reason why prediction markets have surged in popularity so quickly, and why they’re getting so much pushback now, is because they operate in the legal gray area.

There is virtually no specific regulation for what prediction markets can offer event contracts on, as they’re currently overseen by the Commodity Futures Trading Commission (CFTC), which treats them as derivatives exchanges. Some market leaders like Kalshi are working proactively with the CFTC to keep up this relationship, rather than move to state-by-state regulation like traditional gambling.

Prediction markets may be the current example of gambling innovation springing up just past the line of official regulation, but past examples have included sweepstakes, slot machines, daily fantasy sports games, and a wealth of other once-innovative, now-normalized (and regulated) gambling methods.

“Most gambling laws in the US were written to regulate clearly defined activities: casinos, sportsbooks, lotteries, or regulated derivatives markets,” Braden Perry, a litigation, regulatory, and government investigations attorney with Kennyhertz Perry, LLC, explained to ReadWrite. “Innovation happens when a new product doesn’t fit neatly into any of those boxes.

“Prediction markets are a perfect example. They borrow mechanics from futures and options markets, behavioral incentives from gambling, and speech-based framing that resembles polling or forecasting. That hybridity creates regulatory ambiguity, which is where innovation thrives.”

As Perry goes on to note, this is far from incidental. The developers of prediction markets seemingly skirt regulation to create something new, avoiding being weighed down by regulatory ties.

“Developers tend to design products right up to the edge of existing definitions: avoiding ‘chance’ by emphasizing skill or information, avoiding ‘wagering’ by using contracts or tokens, or avoiding ‘consideration’ through alternative purchase mechanisms,” he stated. “This is not accidental. It’s a direct response to highly prescriptive gambling statutes that leave little room for licensed experimentation.”

Where does regulation need to step in?

Prediction markets are in a lightning-in-a-bottle stage right now. With little specific regulation beyond what applies to derivatives exchanges, the playing field is fairly open for experimentation. That’s both a good thing for consumers in terms of offering a lot of variety, but also exposes both users and third parties to potential risk.

“Regulators are often reactive rather than proactive in this space,” Perry continued. “Agencies typically wait for scale, harm, or public visibility before stepping in, especially when jurisdiction is unclear, such as between gaming regulators, securities regulators, and commodities regulators. That delay effectively becomes a window for experimentation.”

A recent example centers around Coinbase CEO Brian Armstrong, who poked fun at prediction markets in the company’s quarterly earnings call on October 30.

lol this was fun – happened spontaneously when someone on our team dropped a link in the chat https://t.co/tQiV3B9jUj

— Brian Armstrong (@brian_armstrong) October 31, 2025

“I was a little distracted because I was tracking the prediction market about what Coinbase will say on their next earnings call,” Armstrong said in his parting remarks, as reported by Bloomberg. “I just want to add here the words Bitcoin, Ethereum, blockchain, staking, and Web3, to make sure we get those in before the end of the call.”

While naturally just being a lighthearted comment, his comment shows just how easily he could manipulate such event contracts. If Armstrong put money on him saying that string of words, he can then easily fulfil said event contract. Make the words something even more random, raise the odds, and he could make even more off the back of it.

There’s no real regulatory framework to prevent anyone from doing this currently, highlighting how such rules are not just prohibitory but also protective for everyone involved. In time, organizations will need to catch up, whether that’s on a state or federal level.

“Historically, this is how many now-regulated products began: daily fantasy sports, online poker, esports wagering, and even early financial derivatives,” Perry said. “Grey areas aren’t a bug in gambling regulation; they’re a structural feature of how innovation tests outdated legal frameworks.”

Featured image: Midjourney

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