Prediction Market Scrutiny Expands to the Municipal Level

Key Takeaways

• Scrutiny of prediction markets has expanded to the municipal level. On August 12, the New York City Council announced an investigation into the marketing and advertising practices of several prominent prediction market platforms, in what appears to be the first municipal legislative investigation focused specifically on prediction market platforms.
• One day later, the City of Baltimore filed separate consumer-protection actions against Kalshi and Polymarket.
• Consumer protection is emerging as a new front. The New York City investigation focuses on advertising, influencers, representations concerning profitability, young consumers, and potentially addictive behavior. Baltimore is proceeding under its municipal consumer-protection law. These developments expand the legal debate beyond the longstanding dispute over whether particular event contracts are federally regulated derivatives or gambling subject to state regulation.

Government Scrutiny Moves Beyond Washington

The majority of official oversight over prediction markets has focused on the federal and state levels.

Congress has introduced more than 10 bills addressing prediction markets since January, ranging from restrictions on trading by government officials to broader prohibitions involving sports, war, elections, and government action. At the same time, the Commodity Futures Trading Commission (“CFTC”) opened a formal rulemaking process, even as states and tribes increasingly challenged the proposition that federally regulated event contracts were beyond the reach of traditional gaming laws.

Those debates remain active. Congress continues to consider new restrictions, the CFTC has advanced its rulemaking, and litigation over federal, state, and tribal authority continues around the country.

The scrutiny, however, is no longer confined to Congress, federal regulators, and state authorities.

Municipal governments have now launched their own investigations, bringing with them different investigative powers and legal theories. The developments in New York City and Baltimore are particularly significant because both focus heavily on consumer-facing conduct: How prediction market products are marketed, represented, distributed, and ultimately presented to users.

That shift creates another source of risk for an industry already navigating an increasingly complex regulatory environment.

New York City Opens a Municipal Legislative Front

On August 12, New York City Council Speaker Julie Menin announced an investigation into the marketing and advertising practices of several prediction markets and, in some cases, their operators.

The Council’s Oversight and Investigations Division sent formal information requests to four companies and announced plans for a public hearing. The inquiry is intended to assess whether additional consumer-protection legislation, enforcement, public education, health measures, or funding may be warranted.

The investigation appears to be the first municipal legislative investigation focused specifically on prediction-market platforms.

The Council is examining allegations involving undisclosed influencer marketing; videos depicting trades that allegedly did not occur; portrayals of wagers as profitable when they allegedly would have resulted in losses; promotion relating to insider trading; and marketing that may reach young adults and minors. The Council has also raised concerns about compulsive wagering and the potential consequences of marketing prediction market products to vulnerable consumers.

Those questions differ from many of the legal disputes that have defined the prediction market industry over the past year.

Much of that litigation has centered on jurisdiction, specifically whether sports and other event contracts traded on CFTC-regulated exchanges fall within the Commodity Exchange Act and federal regulatory authority, or whether states retain authority to regulate those products as gambling.

New York City is targeting prediction markets based upon an entirely different area of the law: consumer protection.

Questions concerning advertising claims, influencer relationships, representations about potential returns, marketing to minors, and consumer harm can generate legislative and regulatory scrutiny regardless of how courts ultimately resolve the broader jurisdictional fight over event contracts.

The Council has itself identified what it views as a regulatory gap, observing that marketing restrictions and consumer protections applicable to casinos and online sportsbooks do not currently constrain prediction markets in the same manner.

The nature of the proceedings is also significant. A legislative investigation can develop well beyond an initial request for information. The Council can hold hearings, seek testimony and documents, exercise subpoena authority under its rules, and use the resulting record to support legislation or other government action.

That makes the investigation relevant even to companies confident in the regulatory status of their underlying products.

Baltimore Turns to Municipal Consumer-Protection Enforcement

Baltimore has also launched its own inquiry into prediction markets.

On August 13, one day after New York City announced its investigation, Baltimore filed separate lawsuits against two prominent exchanges under the city’s Consumer Protection Ordinance.

The complaints allege that sports-related prediction contracts constitute unauthorized sports wagering and that the defendants made misleading representations concerning the legality, regulation, and nature of their products. Baltimore is seeking injunctive relief, restitution, disgorgement, and civil penalties.

One of the city’s investigations is particularly notable because it reaches beyond the prediction market operator itself.

That expansion illustrates a broader development.

Prediction markets are increasingly reaching consumers through brokerages, cryptocurrency platforms, financial applications, affiliates, influencers and other intermediaries. As those distribution channels expand, so too does the universe of entities that may face questions about how the products are described, marketed, and made available.

New York City and Baltimore therefore represent two distinct municipal approaches emerging almost simultaneously: legislative investigation in one jurisdiction and consumer-protection litigation in another.

Both demonstrate that local governments need not wait for the federal-state jurisdictional debate to be resolved before examining other aspects of the prediction market business.

Why the Municipal Shift Matters

The significance of these developments extends beyond New York City and Baltimore.

Prediction market regulation has frequently been discussed as a contest over which regulator has authority over the product. Municipal consumer-protection activity complicates that framework because the inquiry can focus instead on conduct surrounding the product.

How was it advertised? What did consumers understand they were purchasing? Were claims about profitability accurate? Were influencers compensated and properly disclosed? Were products marketed to young people? What role did a brokerage or other distributor play in placing those products before consumers?

Those questions can implicate bodies of law and sources of government authority separate from the legal classification of the underlying contract.

They also create practical challenges for companies operating nationally. Consumer-protection requirements can vary considerably across jurisdictions, while legislative investigations operate according to procedures and political dynamics distinct from conventional regulatory enforcement or litigation.

The result is a regulatory landscape that is becoming more diffuse at the same time the prediction market industry is becoming more mainstream.

What Companies Should Be Doing Now

Companies operating in or adjacent to the prediction market ecosystem should consider several immediate steps.

Review consumer-facing marketing. Advertising, promotional materials, social-media content, and representations concerning profitability, legality, or regulatory status warrant particular attention in light of the theories now being advanced by municipal authorities.

Assess influencer and affiliate relationships. Companies should understand how third parties promote their products, what disclosures accompany sponsored relationships, and what controls exist over statements made on the company’s behalf.

Examine distribution arrangements. Brokerages, fintech companies, cryptocurrency platforms, and other partners should evaluate both their regulatory exposure and their contractual allocation of responsibility for marketing, disclosures, and compliance.

Prepare for legislative scrutiny. Companies should ensure that government-response protocols account for inquiries from legislative bodies as well as regulators. Information requests, document productions, hearings, and witness preparation require a different strategic approach from ordinary litigation or agency enforcement.

Looking Ahead

The prediction-market regulatory landscape remains unsettled. The Third and Ninth Circuits are now divided over whether the Commodity Exchange Act preempts state gaming laws as applied to sports-related event contracts, and petitions seeking Supreme Court review are already pending. Other courts continue to confront related questions, making further appellate developments likely even as the CFTC considers the federal regulatory framework.

That uncertainty makes the emergence of municipal scrutiny particularly significant. While courts and regulators continue to determine the respective boundaries of federal, state, and tribal authority over prediction markets, local governments need not necessarily await resolution of those disputes before examining how the products are marketed, distributed, and presented to consumers.

The question that arises is whether the investigations launched by New York City and the Baltimore herald the beginning of a broader municipal focus on the industry. For prediction market operators and the growing number of companies that distribute, market, or otherwise participate in these products, government scrutiny is increasingly following the product from the exchange to the consumer.