What Happened
- Prediction markets — platforms that allow participants to bet on the probability of future events — have grown explosively, from less than USD 100 million per month in trading volume in early 2024 to more than USD 13 billion by end of 2025 — a roughly 130-fold increase.
- Major platforms like Polymarket (blockchain-based, US-targeted) and Kalshi (regulated, US-based) drove this growth, with the US presidential election of 2024 being a landmark event that demonstrated prediction markets' aggregation capabilities.
- In India, prediction markets are classified as illegal online money games under the Promotion and Regulation of Online Gaming Act (PROGA), 2025 — though the law had not been formally notified (enforced) as of early 2026 and faces a constitutional challenge before the Supreme Court.
- Globally, the US Commodity Futures Trading Commission (CFTC) issued an Advanced Notice of Proposed Rulemaking (ANPR) on prediction market regulation in March 2026, with public comments due April 30, 2026.
- The explosive growth has raised concerns about manipulation, systemic financial risk, addiction, and the blurring of lines between information aggregation markets and gambling.
Static Topic Bridges
Prediction Markets: Concept, Mechanism, and the "Wisdom of Crowds"
A prediction market is a market where participants trade contracts whose payoff is tied to the outcome of a future event. If an event occurs, a contract pays a specified amount (e.g., USD 1); if not, it pays zero. The market price of the contract at any time reflects the collective probability the market assigns to that event occurring. Prediction markets harness the "wisdom of crowds" — the idea that aggregated dispersed information and diverse viewpoints, expressed through price signals, can produce accurate forecasts superior to individual expert opinion.
- Prediction markets function similarly to futures/derivatives markets but the "underlying asset" is a binary outcome (event occurs or not)
- Classic use: forecasting election outcomes, sports results, macroeconomic indicators, corporate earnings
- Theoretical basis: Hayek's "price as information aggregation mechanism" and James Surowiecki's "Wisdom of Crowds" (2004)
- Comparison to derivatives: futures markets (regulated by CFTC in USA, SEBI in India) trade financial instruments; prediction markets trade event-based contracts
- Polymarket: operates on blockchain (smart contracts, Polygon network); Kalshi: regulated US exchange licensed by CFTC
Connection to this news: The regulatory challenge is precisely whether prediction markets are a form of futures market (regulated financial product) or gambling (state-regulated activity subject to prohibition) — the regulatory classification determines which framework applies and whether these markets are legal.
Financial Market Regulation in India: SEBI, Derivatives, and the Gambling Boundary
In India, financial derivatives (futures and options on equities, commodities, currencies) are regulated by the Securities and Exchange Board of India (SEBI) and the Forward Markets Commission (now merged into SEBI). The Public Gambling Act, 1867 — a colonial-era law — criminalises gambling (with some exceptions for skill-based games); online gambling is additionally regulated by state governments under Entry 34 of List II (State List). Prediction markets on events outside financial instruments fall outside SEBI's jurisdiction, making them either unregulated or potentially illegal as gambling.
- SEBI: regulates securities and derivatives markets under SEBI Act, 1992 and Securities Contracts (Regulation) Act, 1956
- Public Gambling Act, 1867: central law prohibiting "game of chance" gambling; skill-based games are exempt (Supreme Court in K.R. Lakshmanan v. Tamil Nadu, 1996)
- PROGA (Promotion and Regulation of Online Gaming Act), 2025: Parliament's attempt to create a unified framework for online gaming (including skill games and money games) — includes classification of "permissible" vs. "non-permissible" online money games
- PROGA's status as of early 2026: passed by Parliament, received Presidential assent August 22, 2025, but not formally notified — facing constitutional challenge on grounds of Centre vs. State jurisdiction over gambling
- IT (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (amended 2023): include provisions for online gaming regulation at central level
Connection to this news: Prediction markets fall into the regulatory grey zone in India — not clearly financial derivatives (SEBI), not clearly skill games (exempt), and potentially prohibited as gambling under the Public Gambling Act. PROGA's classification of them as "non-permissible money games" would make them illegal once notified.
Information Aggregation vs. Market Manipulation: Risks of Prediction Markets
The theoretical appeal of prediction markets — accurate information aggregation — depends on the assumption of many independent, well-informed participants trading honestly. In practice, thin markets (few participants), large single bets, and coordinated manipulation can distort prices. On Polymarket during the 2024 US election, a single large bettor (allegedly a French trader) was estimated to have shifted market probabilities for Donald Trump's victory — raising concerns about whether a single actor can distort information markets with enough capital.
- Market manipulation risk: particularly acute in small or lightly regulated prediction markets; large players can move prices
- Addiction risk: binary outcome contracts share the psychological structure of slot machines — rapid resolution, clear win/loss, dopamine feedback loop
- Systemic risk: if prediction markets scale to macro-financial relevance, self-fulfilling prophecy dynamics become a concern (e.g., a market predicting a bank failure could trigger the very failure)
- Regulatory arbitrage: blockchain-based prediction markets like Polymarket can operate across jurisdictions, evading national regulators
- Liquidity-information trade-off: prediction markets need sufficient liquidity to be informative; restricting them reduces both their financial size and their social informational value
Connection to this news: These are the core reasons both India and the US are actively grappling with how to regulate prediction markets — the CFTC's ANPR (2026) and India's PROGA (2025) represent contrasting approaches: the US seeking to regulate and integrate prediction markets into legitimate financial infrastructure; India leaning towards prohibition.
Key Facts & Data
- Prediction market volume:
USD 13 billion/month (end 2025) — ~130x growth - Polymarket: blockchain-based (Polygon network), no licence, restricted in India and many jurisdictions
- Kalshi: licensed by US CFTC as a regulated prediction market exchange
- India's PROGA, 2025: received Presidential assent August 22, 2025; classifies prediction markets as non-permissible online money games; not yet notified; under Supreme Court challenge
- CFTC ANPR on prediction markets: issued March 2026; public comment deadline April 30, 2026
- Public Gambling Act, 1867: primary anti-gambling law in India (Centre)
- SEBI Act, 1992 and Securities Contracts (Regulation) Act, 1956: govern financial derivatives in India
- US election 2024: proved prediction markets as forecasting tools; Polymarket gave Trump >65% probability days before results