Platforms such as Polymarket and Kalshi, which allow trading on the outcomes of future events, have gained considerable attention during the current war with Iran due to trading activity concerning the timing of a strike in Iran, which generated very substantial profits for several digital wallets on these platforms. This has raised the question of whether insider information trading may have occurred. Beyond the regulatory issue, a moral question has also arisen in the public discourse: is it appropriate to "profit" from dramatic global events that are often associated with significant loss of human life.

However, even before the public debate, a deeper legal question arises: are the activities carried out by Polymarket and Kalshi in fact illegal gambling, or do they constitute legitimate financial trading activity?

The answer to this question may be critical to the future of these platforms in the United States, where many of these platforms operate, and it may also influence how other countries around the world approach similar activities.

The platforms in question operate, in effect, as prediction markets. Users do not "gamble" in the traditional sense; rather, they buy and sell contracts linked to the outcome of a specific future event. Each contract relates to a binary question, for example whether a certain event will occur by a given date or whether a particular sports outcome will materialize. The price of the contract reflects the probability the market assigns to that event, and participants may buy and sell the contracts before the event is resolved. In this sense, the mechanism closely resembles trading in stocks or options.

An important point in this context is that at least some platforms in this field have obtained a federal license from the CFTC, the federal authority that oversees derivatives markets (financial instruments whose value is derived from another asset), to operate as a regulated trading venue for such contracts. The licensing is granted under the federal regulatory framework applicable to derivatives markets, and it allows the platform to operate a trading venue for event-based contracts under regulatory supervision. Accordingly, at least under US federal law, this constitutes lawful and regulated activity.

Nevertheless, since gambling laws in the United States are determined at the state level, some states take the view that, in practice, this activity more closely resembles gambling, particularly where the underlying events are not economic in nature, such as sports outcomes or political events. Accordingly, several US states have taken enforcement actions and initiated legal proceedings against these platforms, on the grounds that state gambling laws override federal law, which treats this activity as trading.

The resulting situation is a legal struggle being conducted in several courts simultaneously. In some cases, for example in Massachusetts, authorities have succeeded in persuading courts that this activity should be classified as gambling, and therefore subject to local gambling laws. In other cases, the platforms have obtained rulings supporting their position that the activity constitutes trading rather than gambling, and in one instance, in the State of Tennessee, a court granted Kalshi a temporary injunction against the state.

In those cases where the platforms succeeded in persuading the courts, they advanced several key arguments. First and foremost, it was argued that the contracts traded on these platforms are, in essence, financial contracts, namely derivatives whose value depends on the occurrence of a future event. According to this approach, these are financial instruments structurally similar to other derivatives traded in financial markets.

Furthermore, the platforms contend that since they operate within trading venues regulated by the CFTC, oversight should be federal and uniform, rather than subject to varying regulation by each state under local gambling laws. In addition, it is argued that the platforms themselves do not operate like traditional gambling sites, as they do not take positions, but rather provide a marketplace in which users trade contracts with one another.

The position of the CFTC is that event-based contracts may be classified as a type of financial derivative and therefore fall within the federal regulatory framework governing derivatives markets. Accordingly, the regulator has expressed the view that such activity should not be subject to parallel regulation under the gambling laws of individual states.

Moreover, the CFTC has expressed a willingness to intervene in legal proceedings conducted in various states, in order to clarify to the courts that, in its view, the authority to regulate this field lies with it. From the regulator’s perspective, this also constitutes a defense of the existing regulatory framework governing derivatives markets in the United States, including commodities markets such as gold and oil, and options on futures contracts, among others. This is a significant development that supports the position of the platforms and illustrates the extent to which the situation remains unclear and how difficult it is to predict the outcome of the legal struggle.

It is also worth noting that in recent days, the CFTC published a brief statement clarifying that prediction markets are not a “gray area,” but rather part of the regulated derivatives market in the United States, a move that signals a more favorable regulatory approach toward platforms such as Kalshi, alongside a clear reminder that the applicable rules remain in force.

The dispute surrounding prediction platforms is not merely a narrow disagreement over regulatory authority. In fact, it raises a broader question regarding the boundary between gambling and financial trading. The decisions that will be rendered in the United States may influence how regulators worldwide approach such platforms. Already today, it is evident that various countries are examining this activity cautiously, and some, such as Belgium and Germany, have even restricted access to such platforms on the grounds that they constitute gambling.

In Israel, at least for the time being, there is no direct legal position regarding the legality of platforms such as Polymarket, and to date the issue has arisen mainly in specific contexts, for example the use of insider information. Legal developments in the United States may also be relevant to Israel and may influence how Israeli authorities and regulators choose to address similar platforms, including the possibility of restricting or even completely blocking access to such platforms.

The writer is head of the Gaming Practice at Amit, Pollak, Matalon