- Key takeaway: Whether and how banks ultimately become involved in the growing market may depend on the outcome of a series of legal and regulatory disputes over who should oversee prediction markets and how those markets should be regulated.
- Expert quote: "The banking community is sort of looking at this and going, 'Oh dear God, we don't have a lot of guidance. We're a heavily regulated industry. We don't want to get this wrong, but we also don't want to miss out on tremendous amounts of money. What do we do?'" —Kevin Frankel, a partner at Benesch.
- What's at stake: The Commodity Futures Trading Commission has asserted authority over prediction markets, but some state regulators are challenging that position.
The growth of and regulatory embrace of prediction markets could offer a new revenue opportunity for banks, but legal uncertainty and consumer protection concerns over the medium- and long-term remain significant hurdles.
Banks have yet to formally enter the space, though firms such as
Prediction market operators such as Kalshi and Polymarket have grown rapidly in terms of total users and total volume of trades in recent years. Trading volume on prediction market platforms increased from
The relatively small market opportunity is compounded by a series of legal and regulatory disputes over who should oversee prediction markets and how those markets should be regulated.
"The banking community is sort of looking at this and going, 'Oh dear God, we don't have a lot of guidance. We're a heavily regulated industry. We don't want to get this wrong, but we also don't want to miss out on tremendous amounts of money. What do we do?'" said Kevin Frankel, a partner at law firm Benesch.
Industry observers say banks could eventually participate by helping clients hedge event-related risks and by facilitating access to prediction market platforms.
Frankel said that if clear rules are established for financial firms and regulators treat prediction markets like standard derivatives, banks are likely to enter the space because they already operate in similar markets.
"Does the bank already deal with the Chicago exchange? Are they allowing people to trade commodities on their platform? And if they are, and we get to a point where the Commodity Futures Trading Commission isn't distinguishing between soybeans and Super Bowl scores, then what are you supposed to do with that?"
Turf war and pending litigation to resolve it
The regulatory framework for prediction markets and which agency will ultimately oversee them has not been resolved, creating uncertainty over supervision.
The Commodity Futures Trading Commission has asserted authority over prediction markets, but some
According to Samuel Lazarus, a special assistant to the president at the Council on Foreign Relations, the CFTC has taken what he described as a "maximally laissez-faire approach" to prediction-market regulation, arguing in court and in public filings that it has exclusive authority to regulate the trading of event contracts. Lazarus said the dispute with state regulators stems in part from the agency's decision to allow exchanges to list contracts tied to events traditionally regulated at the state level, including sports and other gaming-related outcomes.
"The reason they're in a big tussle with state regulators over this is not because state regulators tend to make any claims that they can regulate swaps," he said. "The tussle exists because the CFTC let these exchanges list contracts on sporting events and other contests — speculation that's historically been verboten on designated contract markets, and the exclusive province of state- and tribally-regulated casinos and sportsbooks ."
A number of lawsuits over regulatory jurisdiction are also pending in court, including a case filed against
Frankel noted that banks could face similar risks if they decide to participate in prediction markets before the jurisdictional question is resolved.
"I think the takeaway there is [Robinhood] is kind of the bellwether," Frankel said. "If Bank of America, let's say, decided they wanted to do this, I would expect that they would very quickly get scrutiny from both state agencies and the plaintiffs' bar."
The CFTC did not immediately respond to a request for comment.
The consumer protection problem
Even if jurisdictional matters get resolved, risks regarding consumer protections remain.
Lazarus argued that many event-based contracts function like gambling products and generally end up hurting most participants. For instance, a study from the Federal Reserve Bank of New York found that
Critics of the current regulatory framework argue that prediction markets increasingly resemble gambling products but lack many of the consumer safeguards commonly imposed on sportsbooks and casinos. States have the authority to protect "retail gamblers," including limiting the amount of money individuals can move into gambling accounts, while the CFTC does not have the same power, said Todd Phillips, director at Klaros Group, a financial advisory firm.
"States have laws about limiting the amount of money that people can move into their gambling accounts," said Phillips. "State laws allow people to put themselves on problem gambling lists, so that they are banned from engaging in gambling and things like that. The CFTC just does not have those same legal authorities. It always needs more money from Congress to hire more people to effectively police the markets."
Those protections could influence whether banks feel comfortable entering the market, even if oversight is eventually clarified.
Benesch's Frankel said concerns also remain about user demographics and risk behavior.
"There's some mental health and financial health concerns that states have about what's going on with these prediction markets," he said.
What bank involvement in prediction markets could look like
If banks do enter prediction markets, industry watchers expect involvement to take the form of advising clients on event-related positions or providing liquidity to participants in the market.
Financial advisors could eventually guide clients on event-based trades in a manner similar to how they recommend traditional investments, said Frankel.
"A financial advisor can tell a client to buy 100 shares of Microsoft or to buy soybean futures," he said. "If you can sell them soybean futures or pork bellies, can you also sell them a contract on who's going to win the Super Bowl, or what color Gatorade is dumped on the winning coach?"
Investment banks could participate in prediction markets by providing liquidity, helping establish prices, and trading contracts for their own accounts, industry observers say.
"I think when Goldman and JP Morgan were saying that they were interested in these markets what they were really saying is we might spin up desks that actually trade on these markets, either provide liquidity or maybe even take directional bets," said Lazarus.
But this future largely hinges on how ongoing litigation and regulatory developments play out, which will provide clearer rules for banks to operate within.
"There's that kind of push-pull going on," Frankel said. "Along with it, there are AML and KYC issues, crypto concerns, and
