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- Lucas: So the gaming association just dropped a number that stopped me — they say states have lost a billion dollars in tax revenue because of prediction markets. Not sports betting, not casinos. Prediction markets. Luna: A billion dollars? That's real money. How do they figure that? Lucas: The logic is that prediction markets — think Kalshi or Polymarket — are functionally similar to gambling, but they're regulated as derivatives or not regulated at all. So unlike sports betting, which is legal in many states and taxed, prediction market activity mostly falls outside state tax regimes. Luna: Right, because they're structured as futures contracts or event contracts. That's a different regulatory bucket. Lucas: Exactly. The Commodity Futures Trading Commission oversees them, not state gaming boards. And the CFTC has historically been more permissive — they allow these markets to operate as long as they don't involve 'gaming' under federal law. But the line is blurry. Luna: And the gaming association's argument is: if a user in New York bets on who wins the election or whether the Fed cuts rates, that's a wager. And New York should get a cut, like it does from sports betting. Lucas: Exactly. The association represents state lotteries and casinos, so they have a clear bias. But the billion-dollar figure is based on what states would have collected if prediction market volumes were taxed at standard sports betting rates — around 15 to 20 percent. Volume has exploded. Luna: And there's the CFTC lawsuit against Rhode Island. That's interesting — the CFTC is suing a state. Usually it's the other way around. Lucas: Right. Rhode Island passed a law that essentially tried to ban or restrict prediction markets within its borders, claiming they're illegal gambling. The CFTC says that conflicts with federal commodities law. So you have this regulatory tug of war: states want the tax revenue or want to shut down what they see as unlicensed gambling, and the feds say 'back off, we oversee this.' Luna: And the billion-dollar number — is that just the tip of the iceberg? Because prediction markets are growing fast. Lucas: Definitely. Total volume across the top platforms has been doubling year-over-year. With the election cycle coming up, event contracts on who wins what seat, what the Fed does, even box office numbers for movies — it's huge. The Association for Financial Markets has estimated that if prediction markets become mainstream, states could be losing billions more. Luna: So what's the counterargument? Why not just tax them? Lucas: The counterargument is that prediction markets provide valuable information. They're essentially forecasting tools. The prices reflect the probability of events — that's useful for companies, for policymakers, for researchers. If you tax them or regulate them like gambling, you might stifle that information signal. Luna: But the states need revenue. And if something looks like a bet and quacks like a bet... Lucas: Yeah, and that's the tension. The gaming association is basically saying 'it's a bet, tax it.' The CFTC and the platforms say 'it's a contract, leave it alone.' Meanwhile, the user is just trying to figure out if rates will go up. Luna: And speaking of useful — if today helped you think about this a little differently, we want to mention that the show stays ad-free because of listener support. Lucas: Yeah, if you find these conversations valuable, you can support us at buy me a coffee dot com slash fexingo. It's a small way to keep this going without any sponsored interruptions. Luna: And it really does make a difference. So if you're able, we appreciate it. Lucas: Anyway, back to the regulatory question — where does this leave the average investor? For now, if you're trading prediction markets, you're in a grey area. The CFTC has allowed some, like Kalshi's congressional control contracts, but others have been blocked. It's very case by case. Luna: And the states are pushing back. We might see more Rhode Island-style laws, more lawsuits, and maybe eventually federal legislation to clarify the status. Lucas: That's probably where this ends up. Congress has shown interest — there's been bipartisan talk about whether the Commodity Exchange Act needs updating for event contracts. The question is whether lawmakers will treat prediction markets as a source of revenue or a source of information. Luna: Or maybe a bit of both. Lucas: Right. A licensing fee with a light regulatory touch could give states their cut without killing the information signal. But we're not there yet. For now, it's a billion-dollar question.