Life in the Grey: Why Gaming Innovation Comes from Unregulated Areas

Prediction markets are the latest in a long line of examples of how gambling innovation is taking take root in the gray areas.

The main prediction markets are embroiled in lawsuits across the countrywith certain states like Arizona completely ban certain operators. State governments argue that the services circumvent necessary gaming licensing laws, while prediction markets argue that they should not be subject to state-level regulation.

Although prediction markets mimic traditional gambling games in some ways, especially sports bettingthere are also clearly ways to innovate. Traditional gambling operators would not offer as much entertainment or political betting, if at all. Local betting houses don’t offer odds on what a tech CEO will say at the next all-hands meeting.

These types of crazy bets attract a new audience that wouldn’t typically bet. Talk to SigmaCEO and founder of Yield Sec Ismail Vali noted that those under 30 are the most responsive to prediction markets and their current affairs-style event contracts.

“The under-30s don’t think they’re playing,” he said. “They honestly believe they’re predicting. Whatever that means, but it’s not gambling when it absolutely is.”

Gaming innovation has long operated in legal gray areas

Part of the reason prediction markets have grown in popularity so quickly, and why they face so much pushback today, is that they operate in the legal gray area.

There are virtually no specific regulations on prediction markets that can offer event-driven contracts, as they are currently overseen by the Commodity Futures Trading Commission (CFTC), which treats them like derivatives exchanges. Some market leaders like Kalshi are work proactively with the CFTC maintaining this relationship, rather than moving to state-by-state regulation like traditional gaming.

Prediction markets are perhaps today’s example of gaming innovation arising just beyond formal regulation, but past examples include sweepstakes, slot machines, daily fantasy sports games, and a host of other once-innovative, now standardized (and regulated) methods of gaming.

“Most U.S. gambling laws were written to regulate clearly defined activities: casinos, sports betting, lotteries, or regulated derivatives markets,” said Braden Perry, an attorney specializing in litigation, regulation and government investigations. Kennyhertz Perry, LLCexplained to ReadWrite. “Innovation happens when a new product doesn’t fit neatly into any of these boxes.

“Prediction markets are a perfect example. They borrow mechanisms from futures and options markets, behavioral incentives from gambling, and speech-based framing that resembles surveys or forecasts. This hybridity creates regulatory ambiguity, and that’s where innovation thrives.”

As Perry points out, this is far from coincidental. Developers of prediction markets are apparently bypassing regulation to create something new, avoiding being weighed down by regulatory ties.

“Developers tend to design products at the edge of existing definitions: avoiding ‘chance’ by emphasizing skill or information, avoiding ‘gambles’ by using contracts or tokens, or avoiding ‘quid pro quo’ through alternative purchasing mechanisms,” he said. “This is not accidental. It is a direct response to highly prescriptive gambling laws that leave little room for permitted experimentation.”

Where should regulation come in?

Prediction markets are currently in a hot phase. With little specific regulation beyond what applies to derivatives exchanges, the playing field is fairly open for experimentation. This is both a good thing for consumers as they offer great variety, but it also exposes users and third parties to potential risks.

“Regulators are often reactive rather than proactive in this area,” Perry continued. “Agencies typically wait for scale, damage, or public visibility before intervening, particularly when jurisdiction is unclear, such as between gaming regulators, securities regulators, and commodities regulators. This delay effectively becomes a window for experimentation.”

A recent example centers on Coinbase CEO Brian Armstrong, who made fun of prediction markets during the company’s quarterly earnings call on October 30.

lol that was fun – it happened spontaneously when one of our team members left a link in the chat https://t.co/tQiV3B9jUj

–Brian Armstrong (@brian_armstrong) October 31, 2025

“I was a little distracted because I was following the prediction market on what Coinbase will say on its next earnings call,” Armstrong said in his farewell remarks: as reported by Bloomberg. “I just want to add the words Bitcoin, Ethereum, blockchain, staking and Web3 here, to make sure we get them before the end of the call.”

While this is naturally a light-hearted comment, his comment shows how easily he could manipulate such event contracts. If Armstrong bets money on him saying this string of words, then he can easily fulfill said event contract. Make the words even more random, increase the odds, and he might win even more because of it.

There is currently no real regulatory framework to prevent anyone from doing this, which highlights how these rules are not only prohibitive but also protective for everyone involved. Over time, organizations will need to catch up, whether at the state or federal level.

“Historically, this is how many now-regulated products came to be: daily fantasy sports, online poker, e-sports betting and even early financial derivatives,” Perry said. “Grey areas are not a bug in gambling regulation; they are a structural feature of how innovation tests outdated legal frameworks.”

Featured Image: Halfway

The position Life in the Grey: Why Gaming Innovation Comes from Unregulated Areas appeared first on ReadWrite.

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