Prediction Markets Morph into Bookmakers: Kalshi, Polymarket, and Crypto.com Bet Against Users

Major platforms like Kalshi, Polymarket, and Crypto.com are adopting internal market-makers to trade directly against their customers. This trend, aimed at boosting liquidity and profitability, has sparked controversies over fairness, regulatory compliance, and potential conflicts of interest. While proponents argue it enhances user experience, critics warn it undermines the peer-to-peer ethos of prediction markets, turning them into "house vs. player" setups.

Kalshi, a CFTC-regulated prediction market, has already implemented an internal market-maker through its affiliate, Kalshi Trading. A recent class-action lawsuit filed in Manhattan accuses the platform of operating as an unlicensed sportsbook, misleading users by setting betting lines that disfavor consumers.The complaint alleges that users are essentially wagering "against the House," with the market-maker enabling illegal, unregulated bets on sports events. Kalshi's co-founder, Luana Lopes Lara, defended the practice on X, stating it's a standard, regulated method to provide liquidity without preferential treatment.Despite this, the lawsuit highlights broader legal battles, including rulings from states like Nevada that classify such event contracts as gambling, not swaps under CFTC jurisdiction.

Polymarket, a crypto-native prediction market that gained fame during the 2024 U.S. elections, is in the process of hiring an in-house trading team to match bets and offer features like parlays.This move is seen as a monetization strategy for the fee-free platform, but experts like statistics professor Harry Crane criticize it for creating PR nightmares, legal risks, and eroding neutrality.By trading against users, Polymarket risks blurring lines with sportsbooks, where the house holds a 5-10% edge, potentially inviting lawsuits similar to Kalshi's.Crane noted that while external market-makers could achieve liquidity, an internal desk raises suspicions of unfair advantages, such as access to order flow - echoing past crypto scandals like FTX-Alameda.

Crypto.com, another key player in the crypto space, is hiring a quant trader for its sports-focused market-making team, which will trade against customers on U.S. derivatives.A notable controversy is the 3-second advantage given to market-makers on sports contracts, allowing them to adjust prices ahead of retail traders.The company insists this is fully disclosed to the CFTC and denies any proprietary data access or revenue reliance on prop trading, emphasizing it boosts competition and liquidity alongside external firms like Susquehanna and Jump Trading.However, this has drawn parallels to rivals' issues, with X users and analysts questioning if it's a step toward centralized control in prediction markets.

This evolution comes amid explosive growth in sports wagering on these platforms, with billions in volume, but it faces mounting regulatory scrutiny from states and federal courts.Platforms argue they're legitimate derivatives markets, not gambling, yet lawsuits and cease-and-desist orders from states like Connecticut, Nevada, and Massachusetts suggest otherwise. Decentralized alternatives could gain traction if centralized players get bogged down in litigation, as one X post speculated.

Overall, while internal market-makers promise deeper liquidity and better user experiences, they risk alienating users by introducing perceived house edges and conflicts - potentially reshaping the crypto prediction market into a more bookmaker-like industry.