Polymarket in trouble: "There are lines that must not be crossed"

The New York City Council has opened a new front against prediction markets, as Council Speaker Adrienne Adams sent investigative letters to four companies operating in the field: Polymarket, Kalshi, Coinbase, and Gemini Titan. The companies were required to answer questions regarding how they market their services and the extent of their compliance with consumer protection laws.

In a letter to Polymarket, Adams requested explanations regarding the company's promotional videos, which she claimed displayed fake transactions and even promoted insider trading on social media. Additionally, she raised concerns that some of the advertisements targeted minors. An investigation published in June by the Wall Street Journal examined more than 1,100 videos by content creators associated with Polymarket and found that about 70% of them included dummy sites used to film fake transactions.

Adams presented the companies with more than 60 questions regarding their revenues in New York, the number of users residing in the city, and their marketing activities, giving them 14 days to respond. The City Council is not authorized to file criminal charges, but it can issue subpoenas requiring companies to provide documents. At the same time, the council is considering legislation to increase enforcement and oversight of prediction markets and is even planning to hold public hearings on the matter.

The investigation is taking place against the backdrop of a fierce legal battle surrounding the status of prediction markets in the USA. About a week ago, New York Attorney General Letitia James sued Kalshi, claiming that the company is operating a gambling app illegally. Kalshi rejects the claim and argues that their activity is different from sports betting because users trade against each other and not against a "house," in a manner more similar to a stock exchange.

However, facing New York is the federal regulator. The Commodity Futures Trading Commission (CFTC) announced that it is exercising emergency authority and ordered Kalshi to continue operating in accordance with the principles of the Commodity Exchange Act. This sharpens the central question in the struggle: are prediction markets actually a gambling arena subject to the states, or a financial market under the authority of the federal regulator?

The confrontation even spilled over into a public battle between Kalshi and New York Governor Kathy Hochul. The governor attacked the possibility of betting on a wide range of events, and in particular on the success of medical trials, and claimed that such bets turn the lives of cancer patients into a "side bet." Kalshi responded sharply and called the remarks a "total lie." "There are certain lines that must not be crossed. Turning cancer patients into a side bet is one of them," Hochul wrote in a post on X on August 5. "And that is exactly why New York will not allow companies like Kalshi to break our laws." Behind the legal struggle hides a larger struggle over the boundaries of a new market that is developing in the USA. Platforms like Kalshi and Polymarket allow users to trade on the outcomes of events, ranging from sports and politics to economic and medical events. As the field expands, so does the clash with state authorities, which seek to apply gambling laws to it, while the federal government seeks to keep control of the market under financial regulation.