Prediction markets enable users to bet on the outcomes of future events, providing real-time insights into public sentiment by aggregating collective intelligence. Their structure often mirrors financial markets, with prices reflecting probabilities of outcomes. While studies highlight their accuracy compared to traditional polling, their legality remains contentious globally, as these platforms straddle the line between gambling and skill-based activities.
In India, the legality of prediction markets hinges on whether they are classified as games of skill or chance, as wagering agreements are generally void under the Indian Contract Act. Platforms like Better Opinions and Probo operate in this regulatory grey area, self-classifying as skill-based games but facing allegations of illegal gambling. To ensure consumer protection and enable responsible innovation, policymakers must create a clear framework that distinguishes legitimate prediction markets from gambling, balancing innovation with regulatory oversight.
While Donald Trump won the recent US presidential election, the real winners may have been prediction markets. Polymarket, a leading platform, garnered attention as users bet over $3.7 billion on the election outcome. It also predicted the election outcome more accurately than conventional polls.
Prediction markets are usually structured as yes/no bets on a given outcome; each share pays out $1 if the bet proves correct and zero if not. The price of a share, expressed in cents on the dollar, indicates the market's assessment, when translated into percentage terms, of the prediction coming true. For example, if a token for "Candidate A winning the election" is priced at 60 cents, the market estimates a 60% likelihood of that event happening. As new information becomes available, the token's price adjusts, capturing the aggregated beliefs of participants in real time.
As such, prediction markets can potentially serve as an accurate gauge of public sentiment and a tool for harnessing collective intelligence. Indeed, the Iowa Electronic Markets, a not-for-profit prediction market run by the University of Iowa, recorded an average error rate of approximately 1.5 percentage points in its predictions for the last four US elections. In contrast, Gallup polls for the same elections had an average error rate of 2.1 percentage points.
While prediction markets can help gauge public sentiment on key issues, their legality is contentious. Prediction market contracts are essentially wagering agreements, where users place money on the outcomes of future uncertain events. In certain cases, participation in prediction markets can be classified as gambling, raising regulatory concerns.
The legality of prediction market contracts was scrutinised in a case between Kalshi, an online prediction market, and the Commodities and Futures Trading Commission (CFTC), the U.S. derivatives and commodities regulator. The CFTC deemed Kalshi’s election event contracts, which allowed users to bet on which party would control the U.S. House, Senate, and Presidency, illegal, arguing they constituted gambling. The CFTC relied on the Commodities Exchange Act (CEA), which empowers it to prohibit event contracts related to “gaming” and other unlawful activities.
The U.S. District Court for Columbia, however, rejected the CFTC’s broad interpretation of "gaming." While the court acknowledged that election event contracts involved betting and wagering, it ruled that “gaming” under the CEA must be narrowly construed as “the practice or activity of playing games.” Since election event contracts do not involve any “game,” the court held that the CFTC could not declare them illegal under the CEA.
In India, wagering agreements are generally void under section 30 of the Indian Contract Act. This provision prohibits parties from seeking legal enforcement for agreements contingent on the outcome of future uncertain events.
However, if the wager or bet relies on a party's skill or knowledge rather than mere luck or chance, such agreements are neither void nor illegal. For instance, in Dr. K.R. Lakshmanan vs. State of Tamil Nadu, the Supreme Court has held that betting on horse racing was a game of skill since factors like fitness, and skill of the horse and jockey could be objectively assessed by a person placing a bet. The relevant skill in horseracing is the bettor’s ability to assess the horse and jockey. Similarly, in State of Andhra Pradesh vs Satyanarayana, the Supreme Court held that rummy is a game of skill as the fall of the cards needs to be memorised and considerable skill in holding and discarding cards is involved.
Furthermore, state laws that fail to differentiate between games of skill and games of chance have faced judicial scrutiny. For instance, in Junglee Games India Pvt. Ltd. v. State of Tamil Nadu, the Madras High Court struck down amendments to the Tamil Nadu Gaming and Police Laws that imposed a blanket ban on online gaming, including skill-based games like rummy and poker, for not distinguishing between games of skill and chance. The court held that such indiscriminate prohibitions were excessive and violated the constitutional right to practice any profession or to carry on any occupation, trade, or business under Article 19(1)(g). Similarly, in All India Gaming Federation v. State of Karnataka, the Karnataka High Court invalidated amendments to the Karnataka Police Act that banned all forms of online gaming for stakes without differentiating between skill and chance, emphasizing that games of skill are protected under the Constitution.
Hence, the key question when determining the legality of event contracts and prediction markets in India is whether they constitute games of skill or chance. Prediction markets have demonstrated the potential to reward skill and knowledge by incentivizing informed decision-making and accurate predictions. Studies reveal that participants relying on data analysis, domain expertise achieve significantly higher accuracy. However, luck or chance also remains a significant factor in determining success. For example, research on futures markets, which share structural similarities with prediction markets, indicates that traders' profits are often influenced more by luck than by their ability to predict market movements accurately. This duality makes it challenging to classify prediction markets definitively as games of skill or chance, leaving them in a complex regulatory grey area.
Despite regulatory uncertainties, several "opinion trading" platforms operate in India, offering services that resemble prediction markets. For instance, Better Opinions positions itself as the "stock market for opinions," enabling users to place bets on various events, including sports and elections. Similarly, Probo allows users to predict outcomes across diverse categories such as sports, stock prices, and virtual digital assets.
Both Better Opinions and Probo categorize themselves as games of skill and refrain from offering services in Indian states where online gaming is specifically regulated or prohibited, such as Andhra Pradesh, Assam, and Nagaland. However, this self-classification lacks judicial or legislative validation, leading to potential consumer risks. For instance, in Maharashtra, a woman filed a first information report (FIR) against Probo after ₹1 lakh was withdrawn from her account following her son's participation in prediction contests on the platform. Additionally, in Mumbai, an FIR was lodged against Probo, alleging that it provided betting services under the guise of opinion trading.
In conclusion, prediction markets can be a valuable tool to gauge public sentiment on critical issues. However, their operation in a regulatory grey area poses significant risks, including potential financial harm to consumers and the offering of illegal gambling services under the guise of skill-based gaming. Policymakers must create a regulatory framework that helps distinguish between skill-based and chance-based prediction markets, fostering their development in a controlled environment while safeguarding consumer interests.