Are prediction markets considered gambling? Connecticut orders Robinhood and Kalshi to cease operations, sparking a regulatory battle

The Connecticut state government has issued a cease-and-desist order to prediction market operators Robinhood and Kalshi, accusing these platforms of illegally running online gambling operations in the state and demanding they immediately stop offering sports event contracts. Robinhood responded swiftly, invoking the federal regulator CFTC as a “shield,” emphasizing that its event contracts are under strict federal supervision and that it operates legitimate derivative financial products, not gambling.

Connecticut’s Three Main Accusations: Unlicensed Operation, Policy Violations, Providing Services to Minors

(Source: Connecticut Government Website)

Bryan T. Cafferelli, Commissioner of the Connecticut Department of Consumer Protection, listed three main accusations against Robinhood and Kalshi in a statement. First, these entities have not obtained the required gambling service licenses to operate in Connecticut. In the state, any activity involving monetary wagers on outcomes must be licensed by the state government, and neither Robinhood nor Kalshi has applied for or received such licenses.

Second, even if they had acquired such licenses, their contracts violate numerous other Connecticut laws and policies. Connecticut law imposes strict limits on gambling activities, including maximum bet amounts, minimum age requirements, and problem gambling prevention measures. State officials argue that the design and operation of prediction market platforms’ contracts do not meet these requirements, making them illegal to operate even if licensed.

Third, and most serious, is the accusation of providing betting services to individuals under 21. Connecticut law sets the minimum age for gambling at 21 to protect minors from gambling addiction risks. If Robinhood and Kalshi have flaws in their user registration and age verification systems that allow minors to participate in prediction markets, this would constitute a major legal violation.

Connecticut’s Three Main Legal Accusations Against Prediction Market Platforms

Unlicensed Operation: Offering sports event betting services without holding a Connecticut gambling license

Policy Violations: Contract design and operational methods do not comply with Connecticut gambling regulations

Providing Services to Minors: Flaws in user age verification allow participation by those under 21

According to the notice issued by the state, Robinhood and Kalshi must immediately stop marketing, offering, and promoting any form of contract trading or unlicensed online gambling activities to Connecticut residents, or face civil and even criminal penalties. The severity of this language is rare—“criminal penalties” means company executives could face personal criminal liability, not just corporate fines.

The statement notes that there are currently only three operators in Connecticut holding legal licenses and eligible to offer sports gambling: DraftKings (via Foxwoods), FanDuel (via Mohegan Sun), and Fanatics (via the Connecticut Lottery). All three are traditional sports betting operators, working with casinos or state agencies under strict regulatory frameworks. The state’s implication: To offer sports betting in Connecticut, you must obtain a formal license and submit to full regulation like these three companies.

Robinhood’s Federal Jurisdiction Defense and Legal Dilemma

Facing state accusations, brokerage giant Robinhood responded quickly, wielding the “federal shield.” In a statement, a Robinhood spokesperson emphasized: “As has always been our position, Robinhood’s event contracts are subject to strict federal oversight by the Commodity Futures Trading Commission (CFTC) and are offered through the registered entity Robinhood Derivatives, allowing retail investors to participate in prediction markets in a safe and compliant environment.”

The core logic of this defense is federal jurisdiction supremacy. The CFTC is a federal agency overseeing the futures and derivatives markets. Robinhood argues that its event contracts are, in essence, financial derivatives, not gambling, and thus should fall under the federal CFTC regulatory framework rather than state gambling laws. In the U.S. legal system, federal law generally preempts state law in the event of a conflict.

Robinhood Derivatives is a registered entity established by Robinhood, holding a CFTC Designated Contract Market (DCM) license. This license allows it to offer derivative contract trading, including event contracts. Legally, Robinhood’s structure is clearly intended to position its prediction markets as financial derivatives rather than gambling.

However, Connecticut officials clearly reject this defense. Their position: No matter how Robinhood frames it, letting users bet on sports event outcomes for potential monetary gain is, in essence, sports gambling. The CFTC’s oversight cannot override a state government’s authority to regulate gambling within its borders. This federal-state power conflict may ultimately require a federal court decision.

In other words, Robinhood claims to operate legal financial derivative trading, not “gambling” as described by Connecticut authorities. This question of classification is the core issue of the case. If the courts deem prediction markets to be financial derivatives, Robinhood and Kalshi will fall under CFTC oversight, beyond state interference. If deemed gambling, they must comply with each state’s gambling laws, and any unlicensed operation is illegal.

As for Kalshi, the company has yet to issue an official response. Kalshi’s situation may be even more complex since it is purely a prediction market platform, unlike Robinhood, which also offers stock and crypto trading. Kalshi’s entire business model is built on prediction markets; if classified as gambling and banned in multiple states, it could suffer a fatal blow.

Prediction Markets’ Existential Crisis: Financial Innovation vs. Gambling Regulation

This case highlights the fundamental regulatory dilemma facing the prediction market industry. At the federal level, the CFTC considers prediction markets as derivatives markets and has approved multiple platforms. At the state level, many governments view prediction markets as de facto sports gambling, requiring compliance with gambling laws. This inconsistency between federal and state regulations has left prediction market platforms in a legal gray area.

The distinction between prediction markets and traditional gambling is indeed blurry. Both involve bets on future event outcomes with possible monetary winnings and are functionally very similar. Prediction market platforms emphasize that participants are expressing predictions rather than simply gambling, that price discovery has informational value, and that they adopt financial market trading mechanisms instead of fixed odds. However, whether these differences are sufficient in law to distinguish them from gambling remains contentious.

Connecticut’s enforcement action may trigger a domino effect. If other state governments follow suit, Robinhood and Kalshi may be forced to adjust their business models nationwide, applying for gambling licenses in each state or withdrawing from the sports event contract market altogether. This would be a major blow to the prediction market industry, as sports events are among the most popular prediction categories, contributing significant volumes and revenues.

Three Major Regulatory Challenges Facing Prediction Markets

Classification Dispute: Whether these are financial derivatives or gambling activities lacks clear legal definition

Federal vs. State Jurisdiction Conflict: How to resolve contradictions between CFTC approval and state bans

Licensing Costs: If gambling licenses are required state-by-state, compliance costs will skyrocket

From an industry development perspective, a clear regulatory framework is crucial for the long-term health of prediction markets. The current legal uncertainty exposes platforms, investors, and users to risk. If Congress can enact federal-level prediction market legislation, clarifying their legal status and regulatory standards, it would provide a stable environment for industry growth. Otherwise, the tug-of-war between state and federal regulators may persist for years, stifling innovation and harming user interests.