A regulatory carve-out that once allowed DraftKings and FanDuel to grow into sports-betting giants is now being turned against them, as prediction markets draw a meaningful share of American wagering activity away from traditional sportsbooks.

In 2006, Congress passed the Unlawful Internet Gambling Enforcement Act, a law that did not ban online betting outright but instead prohibited banks from processing payments for it. The legislation carved out a single exception: fantasy sports, which lawmakers viewed as a game of skill rather than a game of chance like wagering on a single game.

At the time, “fantasy sports” meant a season-long league among friends—drafting a team in August, following it all year, and saddling the loser with a ridiculous challenge at the end. DraftKings and FanDuel took that narrow exception and built something Congress never envisioned: contests that players could enter and get paid out on the same day, over and over, all season long. The companies argued the format still qualified as “fantasy sports” under the 2006 law—just faster. For years, regulators largely let it slide.

Then in 2015, New York’s attorney general argued that daily fantasy sports had come to resemble ordinary sports betting more than a game of skill, calling it “a massive, multibillion-dollar scheme intended to evade the law and fleece sports fans across the country,” and ordered both companies to stop taking bets from state residents. Massachusetts chose to regulate rather than ban the games, restricting play to adults 21 and older. Within a couple of years, most states had written daily fantasy into their gambling laws, slowing the rapid expansion DraftKings and FanDuel had previously enjoyed.

Now the two companies are confronting a new industry employing a similar loophole: prediction markets—exchanges where users buy and sell contracts that pay out according to how real-world events resolve. The behavioral data company Fullstory found that 60% of bettors say prediction markets have changed how often they use traditional sportsbooks, and 35% say they are using sportsbooks less as a result.

Americans’ true sports-wagering habit likely exceeds official figures by tens of billions of dollars once prediction markets are counted. Economist Victor Matheson told Fortune the market likely stands at $50 billion to $100 billion—activity that is invisible to state regulators because prediction markets are not classified as gambling. The new survey suggests that hidden money is coming directly out of sportsbooks’ pockets.

Using the same playbook

Where DraftKings and FanDuel leaned on “skill, not chance,” Kalshi and Polymarket’s version is “commodity futures, not gambling.” Their contracts on sports outcomes are regulated by the Commodity Futures Trading Commission (CFTC)—the same federal agency that oversees oil and wheat futures—rather than by individual state gaming boards. As a result, prediction markets do not need to acquire state sportsbook licenses, nor do they pay state betting taxes. In both cases, the growth engine is the same: a definitional gap between what the product is called and what it as—one that state regulators cannot immediately close.

Fullstory’s survey, which polled more than 1,000 U.S. consumers in September, indicates that bettors are drawn to prediction markets primarily by a better experience. Trust and reputation (60%) and ease of use (59%) outranked potential payouts or odds (51%) as the top reasons people choose a platform, and 77% of respondents said they have switched gaming platforms entirely on the strength of user experience alone.

“Our research suggests that prediction markets are changing betting behavior, with more types of events to predict, greater transparency around outcomes and pricing, and an easier or more intuitive experience as top reasons why consumers would consider a prediction market over a sportsbook,” Jason Wolf, president of Fullstory, told Fortune. “That should be a wake-up call for traditional sportsbooks.”

Americans legally wagered $166.94 billion on sports in 2025, generating $3.71 billion in state tax revenue. The American Gaming Association estimates that prediction markets have diverted more than $500 million in potential sports-betting tax revenue away from states. Illinois attempted to stem those losses with a 15% tax on prediction-market sports contracts, but Kalshi sued, arguing the state has no authority over a federally regulated product. Similar legal fights are underway in Nevada, New Jersey, and Maryland. How those cases are resolved will help determine whether states can still use the tool that eventually reined in daily fantasy—state law—or whether a federal classification places prediction markets beyond their reach.

Sports remain the most popular betting category even among prediction-market users, and a quarter of survey respondents said they use both kinds of platforms—just for different events—a sign that the shift, for now, is partial rather than total.

“The biggest threat prediction markets pose to sportsbooks may not be that consumers stop betting on sports,” Wolf said. “It’s that they reset consumers’ expectations for what a betting experience should look like. Once consumers become accustomed to more choice, greater transparency, and intuitive digital experiences elsewhere, they’ll bring those expectations to every platform they use.”

This story was originally featured on Fortune.com.