In 2006 Congress passed a law called the Unlawful Internet Gambling Enforcement Act, which didn’t ban online betting but rather, banned banks from processing payments for it. It carved out one exception: fantasy sports, because Congress considered it a game of skill, not a game of chance like betting on a single game is.
And in 2006 “fantasy sports” meant a season-long league with your friends, like how you draft a team in August and watch it all year, and ultimately have a ridiculous challenge for the loser at the end. DraftKings and FanDuel took that old exception and built something Congress never pictured: contests you enter and get paid out on the same day, over and over, all season long. They argued it was still “fantasy sports” under the 2006 law, just faster. For years, regulators mostly let it slide.
Then in 2015 New York’s attorney general argued daily fantasy sports had started looking less like a game of skill and more like ordinary sports betting, calling it “a massive, multibillion-dollar scheme intended to evade the law and fleece sports fans across the country,” and ordered both companies to stop taking bets from state residents. Massachusetts regulated rather than banned the games, and restricted play to adults 21 and older. Within a couple of years, most states had written daily fantasy into their gambling laws, stopping DraftKings and FanDuel from expanding as quickly as they did before.
Now, DraftKings and FanDuel are having to deal with a new industry using a similar loophole: prediction markets. The behavioral data company Fullstory found that 60% of bettors say prediction markets have changed how often they use traditional sportsbooks, and 35% say they’re using sportsbooks less because of them.
Americans’ true sports-wagering habit likely exceeds official figures by tens of billions of dollars once prediction markets are included. Economist Victor Matheson told Fortune the market likely stands at $50 billion to $100 billion, which is invisible to state regulators because prediction markets aren’t classified as gambling. And the new survey suggests that hidden money is coming directly out of sportsbooks’ pockets.
Using the same playbook
Instead of “skill, not chance,” Kalshi and Polymarket’s version is “commodity futures, not gambling,” or contracts on sports outcomes regulated by the CFTC. That’s the same federal agency that oversees things like oil and wheat futures, not individual state gaming boards. As a result, prediction markets don’t have to acquire a state sportsbook license, nor do they have to pay a state betting tax.
Polling more than 1,000 U.S. consumers in September, Fullstory’s survey says bettors are pulled toward prediction markets because of a better experience. Trust and reputation (60%) and ease of use (59%) beat out potential payouts or odds (51%) as the top reasons people pick a platform, and 77% said they’ve switched gaming platforms entirely over the user experience alone.
“Our research suggests that prediction markets are changing betting behavior, with more types of events to predict, greater transparency around outcomes and pricing, and an easier or more intuitive experience as top reasons why consumers would consider a prediction market over a sportsbook,” Jason Wolf, president of Fullstory, told Fortune. “That should be a wake-up call for traditional sportsbooks.”
Americans legally wagered $166.94 billion on sports in 2025, generating $3.71 billion in state tax revenue. The American Gaming Association estimates prediction markets have diverted more than $500 million in potential sports-betting tax revenue away from states. Illinois tried to stop that with a 15% tax on prediction-market sports contracts, but Kalshi sued, arguing the state has no authority over a federally regulated product. Similar fights are underway in Nevada, New Jersey, and Maryland.
Sports remain the most popular betting category even among prediction-market users, and a quarter of survey respondents said they use both kinds of platforms, just for different events—a sign the shift, for now, is partial rather than total.
“The biggest threat prediction markets pose to sportsbooks may not be that consumers stop betting on sports,” Wolf said. “It’s that they reset consumers’ expectations for what a betting experience should look like. Once consumers become accustomed to more choice, greater transparency, and intuitive digital experiences elsewhere, they’ll bring those expectations to every platform they use.”
