The Regulatory-Driven Shift in the Online Gambling and Prediction Markets: Implications for DraftKings, Flutter, and Kalshi

The online gambling and prediction markets in the United States are undergoing a seismic shift, driven by regulatory ambiguity, technological innovation, and the rapid rise of platforms like Kalshi. The recent $300 million funding round by Kalshi-valuing the company at $5 billion-has intensified scrutiny of its business model and its potential to disrupt traditional sports betting operators such as DraftKings and Flutter. As the Commodity Futures Trading Commission (CFTC) and state regulators grapple with how to classify event-based trading contracts, investors are left to navigate a landscape of uncertainty and opportunity.

Regulatory Uncertainty and Kalshi's Expansion

Kalshi's expansion into 140 countries and its introduction of parlay-style contracts-long-shot bets on multiple outcomes-have positioned it as a hybrid between a financial exchange and a gambling platform. According to The New York Times, the company's reliance on CFTC jurisdiction has allowed it to operate in all 50 U.S. states, despite cease-and-desist orders from regulators in Nevada, Ohio, Illinois, and Arizona, as reported by Sportsbook Review (see Sportsbook Review). These states argue that Kalshi's products function as unregulated gambling services, circumventing state-specific licensing and tax requirements.

The CFTC, led by Acting Chairman Caroline Pham, has yet to issue a definitive ruling on whether sports-based event contracts fall under its purview, according to a WilmerHale client alert. This regulatory vacuum has created a fragmented legal landscape, with courts in Nevada and Maryland issuing conflicting rulings on Kalshi's federal preemption claims (the WilmerHale client alert outlines these conflicts). Meanwhile, Kalshi's integration of blockchain technology-supporting Bitcoin and Solana-has further blurred the lines between prediction markets and decentralized finance (DeFi), attracting both institutional investors and regulatory skepticism, as noted in a WRAL Markets article.

Market Structure Changes and Competitive Dynamics

Kalshi's growth has directly impacted traditional sports betting operators. Shares of DraftKings and Flutter fell sharply in October 2025 after the platform launched NFL-related parlay contracts, which mimic the structure of traditional sportsbook wagers but are framed as CFTC-regulated financial instruments, according to Sportsbook Review. Morgan Stanley analysts argue that this market reaction is an overcorrection, noting that DraftKings and Flutter have the operational flexibility to adapt to regulatory clarity (the New York Times coverage cites these analyst views). Berenberg similarly upgraded DraftKings to "Buy," emphasizing that no significant shifts in user demand have been reported by the company (see the WilmerHale client alert for related legal context).

However, the threat of regulatory arbitrage looms large. If Kalshi's model is deemed legal under federal law, it could expand into states where traditional sports betting remains restricted, creating a parallel market for event-based trading, a scenario discussed in a Motley Fool article. This scenario has prompted short sellers like Spruce Point Capital Management to warn of a potential 35-60% downside for DraftKings if prediction markets capture significant market share (the WilmerHale client alert addresses some of the legal risks). Conversely, proponents like Cathie Wood of Ark Invest view the stock's decline as an opportunity, with the firm adding a substantial stake in DraftKings in early October 2025 (coverage in the Motley Fool article details the stake).

Investor Sentiment and Strategic Adaptations

Investor sentiment remains polarized. On one hand, the Massachusetts Attorney General's lawsuit against Kalshi-alleging that its contracts are disguised wagers-has raised concerns about the platform's long-term viability, as reported by The New York Times. On the other, Kalshi's $50 billion in projected annualized trading volume for 2025 (up from $300 million in 2024) underscores its appeal to institutional investors seeking exposure to a nascent asset class, according to the WRAL Markets article.

Traditional operators are also adapting. DraftKings has partnered with Webull and Robinhood to integrate event trading into its platform, while Flutter has lobbied state legislatures to clarify the legal status of prediction markets, actions chronicled by Sportsbook Review. These moves reflect a broader industry strategy to either co-opt or counter Kalshi's innovation.

The Path Forward

The regulatory outcome will determine the trajectory of this market. If the CFTC affirms Kalshi's federal jurisdiction, prediction markets could become a $50 billion+ sector, with Kalshi dominating 60% of the global market share, as estimated in the WRAL Markets article. Conversely, a ruling favoring state regulators could force Kalshi to scale back operations, preserving the dominance of DraftKings and Flutter.

For investors, the key variables are:
1. Regulatory clarity from the CFTC and state courts.
2. Consumer adoption of prediction markets versus traditional betting.
3. Strategic pivots by incumbents to either compete with or collaborate with platforms like Kalshi.

In the short term, volatility is inevitable. But as Morgan Stanley notes, "Regulatory clarity-rather than uncertainty-will ultimately unlock value for operators who can navigate the new landscape" (this view was referenced in The New York Times).