The Legality of Prediction Markets: Polymarket, Kalshi, the Crime of Gambling and Financial Regulation

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

Participants buy and sell "will happen" and "will not happen" positions on the winner of an election, a change in the policy interest rate or the result of a sports tournament, and the positions are settled once the outcome is determined. Prediction markets are used both as a mechanism for aggregating people's forecasts and as short-term speculative products. In the United States, the Commodity Futures Trading Commission (CFTC) issued an advisory on exchanges' disciplinary enforcement in February 2026 and sued state authorities in April. This is an area where the supervision of exchanges and state gambling regulation intersect.

If you start the same service in Japan, the analysis begins with the crime of gambling under the Penal Code, because participants contribute money or other assets and, depending on a chance outcome, one side gains while the other suffers a loss. Simply bringing in the example of these products being treated as financial instruments in the United States does not provide a basis for their assessment under Japanese law. Together with the criminal law assessment, the application of the Financial Instruments and Exchange Act and the Payment Services Act also needs to be checked, depending on the underlying index, the means of settlement and how customer assets are managed.

What Is Traded in a Prediction Market

In a typical prediction market, several options are set for a future event and participants buy positions corresponding to each option. When the outcome is determined, a fixed amount is paid on the correct positions, and the incorrect positions lose their value or come close to doing so. Because trading prices move to reflect market participants' forecasts, some services also allow positions to be sold before settlement.

This mechanism differs from a survey that collects answers. Participants do not merely submit opinions; they take on the risk of losing their own funds. Whereas non-life insurance compensates for loss caused by an accident on the premise of an insurable interest, prediction markets also take as their subject events that are not linked to the participant's own loss, such as election results or another company's earnings. The comparison here is with non-life insurance; life insurance, which pays fixed benefits, involves a separate analysis.

Whether the service is called a "market," an "information exchange" or "event contracts," its assessment under Japanese law is based on the substance of the transactions. A service in which users compete for rankings using only free points, a service in which users contribute cash and receive payouts depending on the outcome, and a service in which users receive a fixed research honorarium have different legal structures even if they use the same forecasting function.

The Crime of Gambling as the Central Issue

Article 185 of the Penal Code (Japanese) provides: "A person who gambles shall be punished by a fine of not more than JPY 500,000 or a petty fine; provided, however, that this shall not apply where the person merely bets a thing provided for momentary entertainment." Where habitual gambling is recognized, beyond mere repetition, the crime of habitual gambling becomes an issue, and where a person operates a gambling place or organizes gamblers for profit, the crime of operating a gambling place for profit becomes an issue. The statutory penalty for the latter is imprisonment for not less than three months and not more than five years (Article 186, paragraph 2).

The provision does not define "gambling," but it is generally understood to mean contending over the gain or loss of property or a property benefit by a chance outcome. "Chance" means a state in which the parties can neither foresee the result with certainty nor control it, and it is understood that it suffices for an element of chance affecting the result to remain, even if the hit rate can be increased through statistics or expert knowledge.

The other element, "contending over gain or loss," is understood to refer to a relationship in which the parties each bear the risk of losing property and a property benefit is transferred according to who wins or loses. The "thing provided for momentary entertainment" in the proviso to Article 185 is an exception that has in mind things such as food and drink consumed on the spot.

The Boundary with the Crime of Lotteries

If the structure in which participants face each other and contend over gains and losses is weak, and the mechanism is instead one in which the operator collects payments and distributes unequal benefits to purchasers according to a chance outcome, the crime of lotteries under Article 187 of the Penal Code (Japanese) also comes into view. Paragraph 1 of that Article provides that a person who sells lottery tickets shall be punished by imprisonment for not more than two years or a fine of not more than JPY 1.5 million.

A lottery is explained as the seller selling tickets or the like for consideration and distributing unequal property benefits among purchasers by a chance method. Public lotteries are lawfully operated because they are sold under a special law, the Act on Prize Tickets (the lottery ticket law). A private business cannot create the same exception merely by preparing terms of use.

Institutional Differences from Event Contracts in the United States

In the United States, certain event contracts are offered as derivatives under the Commodity Exchange Act under the supervision of the CFTC. That said, not every subject can necessarily be listed freely. The Commodity Exchange Act has a framework under which contracts involving unlawful activity, violence or terrorism, war, gaming and the like can be prohibited as contrary to the public interest. Disputes also continue over the boundary with state gambling regulation.

On February 25, 2026, the CFTC issued an advisory on the use of nonpublic information, market manipulation and the like, highlighting two disciplinary enforcement actions that Kalshi itself had taken. Kalshi was the entity that imposed the sanctions in these two cases, and the CFTC used them to call attention to the issues. Further, in April of the same year, in response to Wisconsin's attempt to regulate Kalshi, Polymarket and others under state gambling law, the CFTC itself filed suit on the ground that federal commodity futures regulation takes precedence. Federal preemption should be distinguished as the position the CFTC asserted in this litigation.

Details can be found in the CFTC's release of February 25, 2026 and its release of April 28 of the same year. In addition, the CFTC's release of June 10, 2026 presented proposed rules on the scope of contracts linked to individuals' activities and the review of contracts contrary to the public interest. This release is a proposal for public comment and cannot itself be treated as a rule already in force.

Japan's Financial Instruments and Exchange Act also defines derivative transactions, but it is a system that captures transactions based on interest rates, currencies, financial instruments, financial indicators and the like along statutory categories. Financial indicators under Article 2 of that Act include figures relating to weather, and there are also types of transactions linked to events relating to credit status or events specified by laws and regulations. The subjects are not limited to financial market prices. Economic similarity alone, in the sense of settling money in connection with an event, does not necessarily make every prediction market a derivative under the Financial Instruments and Exchange Act. Whether a product falls within the scope of financial regulation, and whether its gambling nature under the Penal Code can be denied as a lawful financial transaction, are assessed individually in light of the relevant laws and regulations. Gambling regulation cannot be avoided merely by using a name resembling a financial instrument. On the other hand, lawful derivative transactions conducted in accordance with the relevant laws and regulations are assessed in light of their institutional basis. Even for a market registered abroad, solicitation and transactions in Japan require analysis under Japanese law in the same way.

How the Assessment Differs for Services Aimed at Japan

When offering a prediction market in Japan, the starting point is to sort out what participants contribute, what they lose when they are wrong, and who bears the source of payments to those who are right. Because participants cannot control the results of elections or matches, chance is easily affirmed, and the dividing line in the assessment lies on the side of gain and loss. A structure that collects cash or convertible crypto assets from participants and transfers the losses of the wrong side to the right side is assessed as close to the relationship of "contending over gain or loss" in the crime of gambling. Even in a model in which the operator receives only a fee per transaction and matches participants' orders, the fact that it provides the venue and profits from it remains. Whether the operator acts as the counterparty itself or intermediates orders merely changes the degree of the operator's involvement and is not a reason that resolves the gambling nature among participants. The path of relying on the proviso to Article 185 is also considered limited, because it is difficult to explain a service in which participants continually put in cash, crypto assets or convertible points as betting a "thing provided for momentary entertainment" consumed on the spot.

In relation to the crime of lotteries, the fact that prices move according to order flow and positions can be sold before maturity differs from traditional lotteries. However, the more the design leans toward the operator selling participation rights at a fixed price and paying prizes from its own funds according to the outcome, the harder it becomes to explain the service as a trading market among participants. Whether the crime of gambling or the crime of lotteries may be implicated changes depending on the consideration for participation and the mechanism for distributing benefits. Check, along the elements of each crime, whether there is a relationship in which participants contend over the gain or loss of property, or a lottery structure in which chance benefits are distributed for consideration. Since even a sweepstakes with free entry can involve the distribution of prizes by chance, the existence of a drawing or winners alone does not decide the matter.

By contrast, in a research-type model in which participants contribute no property and the operator pays a fixed honorarium from research funds or the like regardless of whether the answer is right, there is no loss of property on the participants' side. Mechanisms that grant non-convertible points for internal demand forecasting or research purposes also leave room to check individually whether they amount to a property benefit, such as whether the points can be exchanged for prizes or rights to use paid services, but they are clearly distant from paid-participation models (where prizes are offered, a separate check under the Premiums and Representations Act arises). However, in designs that advertise free participation while making only paid members eligible for high-value prizes, or increasing the number of predictions according to the amount spent on points, payment and outcome become linked again.

Where the subject is the market price of financial instruments, interest rates, exchange rates, weather or other statutory financial indicators, and the product adopts the structure of cash settlement or margin trading, derivative transactions and business regulation under the Financial Instruments and Exchange Act must be checked separately. If functions are built in to hold and remit legal tender for customers, to exchange and manage crypto assets, or to issue proprietary paid points, regulation such as funds transfer business and crypto asset exchange business under the Banking Act and the Payment Services Act, and prepaid payment instruments, comes into play. Stablecoins should also not be equated with crypto assets based on their name alone; check the applicable system, such as electronic payment instruments. Here, the argument that "it is not gambling because settlement is in crypto assets" does not hold, because crypto assets can also constitute a property benefit.

Where an overseas service is localized into Japanese, advertised to residents of Japan and promoted through domestic affiliates, check from both the contracts and the actual circumstances where the service is provided, who solicits customers and who receives customer assets. In addition to whether access is blocked, factors such as Japanese-language support, display of amounts converted into Japanese yen and campaigns aimed at Japan are major circumstances indicating whether the service targets the Japanese market.

Like online "oripa" (randomized trading card packs), this is a business in which chance outcomes and transfers of property meet, but for both prediction markets and randomized product sales, legality cannot be decided solely by whether the arrangement takes the outward form of a sale of goods. The differences from randomized product sales are covered in Legal Regulation of Online Oripa.

Starting the Analysis from the Flow of Funds and Rights

In consultations on prediction markets and event contracts, before looking at screen designs, we check how funds and rights move among participants, the operator, market makers and payment service providers. At LegalAgent, in addition to assessing the scheme under the Penal Code, we check across the applicability of the Financial Instruments and Exchange Act and the Payment Services Act, through to the terms of use and advertising. For related support, please see FinTech and Payments Law, Web3 and Blockchain Law, Startup Legal and Fundraising Support and Legal Outsourcing.

Frequently asked questions

Does operating a prediction market service in Japan constitute the crime of gambling?

If the design has participants contribute money or other assets and contend over the outcome, it is likely to constitute the crime of gambling under the Penal Code. Gambling is understood to mean contending over the gain or loss of property or similar benefits by a chance outcome, and the results of elections and similar events are readily found to involve chance. A structure that collects cash or convertible crypto-assets and transfers the losses of the side that guessed wrong to the side that guessed right is assessed as close to a relationship of contending over gains and losses, and the gambling nature is not eliminated even in an intermediary format in which the operator receives a fee.

Will a prediction market treated as a lawful financial product in the United States also be lawful as a derivative in Japan?

Even if it is treated as a financial product in the United States, it will not necessarily be a lawful derivative in Japan. Japan's Financial Instruments and Exchange Act defines derivatives according to statutory categories, and economic similarity in settling by reference to an event is not enough for a product to fall within them. Whether it falls within the scope of financial regulation and whether its gambling nature can be denied as a lawful transaction are understood to require separate assessment.

Will a survey-type prediction market in which participants do not contribute funds be assessed as lawful?

With a survey-type design in which participants do not lose any property, the relationship of "contending over gains and losses" required for the crime of gambling is unlikely to arise. In a format in which participants contribute no property and receive a fixed reward regardless of whether their predictions are correct, there is no relationship of contending over the gain or loss of property. However, if the scheme includes a mechanism that links payment to results, such as increasing the number of predictions according to the amount of points purchased, the assessment is likely to differ.