How do prediction markets work, and what are Polymarket and Kalshi?
During 2025 and 2026, a new category burst into the global gambling regulatory debate: prediction markets. Platforms like Polymarket and Kalshi evolved from niche experiments associated with the crypto universe to become financial infrastructure with combined annual volumes estimated in hundreds of billions of dollars, a presence in relevant electoral cycles, and direct attention from regulators in the United States, the European Union, Brazil, and other countries. The question dividing the sector is simple yet profound: are they bets or financial contracts? The answer impacts taxes, licenses, consumer protection, and the very boundary between iGaming and derivatives markets. This guide explains what a prediction market is, how it works, why Polymarket and Kalshi became benchmarks in the segment, and what is happening with regulation in the United States and Latin America.
The journey goes from the basics—what an event contract is and how its price is formed—to the latest regulatory debate, focusing on what the Brazilian SPA is looking at, the bills in Congress, and the public consultation opened by the European Union. The goal is to offer a solid and honest foundation to understand a phenomenon that, in just a few months, ceased to be marginal and settled at the center of the discussion about the future of online gambling.
What is a prediction market?
A prediction market is a platform where users buy and sell contracts linked to the outcome of a future event, usually binary. The most classic example: a contract on the question "Does candidate A win the presidential election?" pays one dollar if the answer is yes when the event is resolved, and zero dollars if the answer is no. While the election is not decided, that contract trades between zero and one dollar according to the implicit probability the market assigns to the outcome. If at a given moment the contract trades at sixty-five cents, that reflects the market's aggregated belief that there is a sixty-five percent probability of the event occurring.
This logic is radically different from that of a traditional sports bet. In sports betting, the operator or sportsbook sets an odd, acts as the counterparty, and obtains its margin, known as overround, by adjusting the odds so that the sum of implicit probabilities exceeds one hundred percent. In a prediction market, there is no house. Each operation is an exchange between two users, one who buys "yes" and another who sells "yes," and the platform charges a small commission for facilitating the transaction. This structural difference—house versus bilateral market—is at the heart of the entire legal and regulatory debate.
Polymarket and Kalshi: two distinct models
Although often mentioned together, Polymarket and Kalshi are platforms with very different architectures and legal frameworks. Polymarket was born in 2020 as a blockchain-based platform, operates with USDC as the unit of exchange, its markets are public, anyone can consult the complete transaction history of a contract, and the international version was not authorized for US users for years. It recently launched Polymarket US, a version specifically designed to comply with the regulation of the Commodity Futures Trading Commission, known as CFTC, the US federal regulator of derivatives markets.
Kalshi followed an opposite path from the beginning: it was established as a Designated Contract Market, a legal entity authorized by the CFTC to operate event contract markets under federal derivatives regulation. This allows it to offer its markets in all fifty US states with explicit regulatory backing, even when most of those states have not legalized online sports betting. The difference is enormous. While an iGaming operator needs state-by-state licenses, Kalshi operates nationally under the CFTC's umbrella. This regulatory arbitrage is precisely what is generating conflict with state gambling regulators and with the traditional gambling industry itself.
The legal argument: event contracts, not bets
The core of the legal defense of Kalshi and the regulated version of Polymarket is that their products are not bets but event contracts, a concept provided for in the US Commodity Exchange Act and recognized by the CFTC. Under this interpretation, what the user does when buying a contract on who will win an election or who will be the champion of a tournament is not to gamble against a house but to take a position in a derivatives market, just as one buys a future on the price of wheat or oil. The price reflects the aggregated probability, the market sets the odds, not the house, and the platform merely operates the infrastructure.
State gambling regulators reject this interpretation. For several of them, what defines the nature of the activity is not the technical mechanism of price formation but the fact that the user risks money on the outcome of an uncertain event. From this perspective, an event contract on who wins a football match is essentially a sports bet, subject to gambling regulation. Universities like Stanford state it very clearly: the technical distinction between house odds and market odds may be irrelevant from the player's point of view and the social risk involved. This debate is currently in full swing and still has no unified answer.
The CFTC and Congress: regulation in motion
During 2026, the US regulatory landscape accelerated. CFTC Chairman Michael Selig announced in January that the agency would write specific rules for prediction markets and, in parallel, withdrew an earlier proposal that would have prohibited contracts on sports and politics. This decision tipped the balance towards a scenario of regulation, not prohibition, within the federal derivatives framework. A few months later, a formal CFTC proposal on how to specifically regulate prediction markets was under White House review, according to public documentation.
The US Congress itself, through a report from the Congressional Research Service, raised the central question: if the CFTC has exclusive jurisdiction over event contracts traded on designated markets, then states lose regulatory capacity over that activity. Gary Gensler, former chairman of the CFTC and SEC, argued that this interpretation is not supported by the Dodd-Frank Act of 2010, which opens the door to future legal disputes. In parallel, the state-regulated gambling industry, especially sports betting operators with state-by-state licenses, has been lobbying Congress to curb the national expansion of prediction platforms.
Brazil enters the debate
Latin America began to observe the phenomenon when volumes in prediction markets linked to regional issues began to grow. In the case of Colombian elections, for example, Polymarket moved more than one hundred thousand dollars in contracts related to the presidential race projected for 2026. In May 2026, Brazil's Conselho Monetário Nacional approved Resolution 5.298, a rule that directly addresses the issue of prediction markets linked to local payment flows, in a move that the sector interpreted as a first explicit regulatory signal for the segment.
A few weeks later, Brazilian Congressman Márcio Marinho introduced Bill 2.651 of 2026, which seeks to specifically frame prediction markets within Brazilian gambling and betting legislation. The technical discussion on whether they should be regulated as fixed-odds bets under Law 14.790, as financial markets under the competence of the Comissão de Valores Mobiliários, or as a new category is open and promises to be one of the major regulatory debates of the coming year. A similar issue is raised by the public consultation opened by the European Union in May 2026 on how to frame Kalshi and Polymarket within the community regulatory framework.
Risks: integrity, insider trading, and problem gambling
The growth of prediction markets also brought to light specific risks that traditional gambling regulation does not adequately address. One of the most prominent cases was that of a Google engineer facing federal charges in the United States for insider trading to operate over one million two hundred thousand dollars on Polymarket regarding the outcome of the Year in Search 2025, data he knew due to his role within the company. This case opened an unprecedented discussion: if prediction markets are financial contracts, then the concepts of insider trading apply directly, with criminal consequences that do not exist in sports betting.
In parallel, there is the risk of market manipulation through coordinated operations, which is fundamental in political contracts where a relatively low volume can move implicit probability and generate media narratives. And there is the risk of problem gambling: although the platform presents itself as a financial market, the behavior of an individual user who takes recurrent positions on sports or political events can be psychologically indistinguishable from that of an online bettor. European and Latin American regulators are particularly attentive to this point, because the financial market discourse does not exempt the platform from its effective social impact.
What's happening in LatAm and why it matters
For Latin America, the debate on prediction markets has additional layers. On the one hand, these products are accessible from the region through international versions, without local licenses, without tax retention, and without responsible gambling obligations. This means that the volumes moved by Polymarket and similar platforms in markets like Colombia, Argentina, Chile, or Mexico are volumes that completely escape the national tax system and the gambling regulatory frameworks that each country is building. On the other hand, certain predictive products are genuinely useful as hedging instruments for companies and for collective information on political events, a function that traditional sports betting does not fulfill.
The open question for Latin American regulators is whether they should prohibit the segment, frame it within the general betting regime, create a specific category with a financial license, or await the consolidation of the debate in the United States and Europe before acting. Brazil has already taken the first step with Resolution 5.298 and Bill 2.651/2026. The rest of the region is still observing. What seems clear, in any case, is that in the medium term it will be impossible to ignore the phenomenon: prediction markets are not a passing fad but a category with technological roots, real demand, and institutional capital behind it, which will force Latin America to define its position within the new global map of digital gambling.
Tags: LatAm iGaming, prediction markets, Polymarket, Kalshi, prediction markets regulation, CFTC, Brazil bets