Massachusetts regulators have launched an investigation into Robinhood’s latest venture, a prediction-markets hub that allows users to place bets on the outcomes of the NCAA’s March Madness basketball tournaments. The move has drawn concerns from state officials, who question whether the trading platform is blurring the lines between investing and gambling.

Secretary of the Commonwealth Bill Galvin issued a subpoena to Robinhood on March 20, seeking information on how many Massachusetts-based brokerage account holders have requested to trade college sports event contracts. His office is also requesting internal communications regarding the company’s decision to introduce these contracts despite previous scrutiny from regulators.

Galvin has voiced strong reservations about the initiative, according to Reuters, stating, “This is just another gimmick from a company that’s very good at gimmicks to lure investors away from sound investing.” He expressed particular concern that Robinhood is “linking a gambling event on a popular sports event that’s especially popular to young people to a brokerage account.”

Robinhood’s Defense and Regulatory Landscape

Robinhood maintains that its event contracts comply with regulations set by the U.S. Commodity Futures Trading Commission (CFTC). A company spokesperson emphasized that “prediction markets have become increasingly relevant for retail and institutional investors alike, and we’re proud to be one of the first platforms to offer these products to retail customers in a safe and regulated manner.”

The prediction markets hub operates through KalshiEX, a derivatives trading platform registered with the CFTC. This partnership enables Robinhood to offer users the ability to trade contracts on various outcomes, including economic events and sports competitions like March Madness. However, the regulatory standing of such markets remains contentious, as critics argue they closely resemble gambling rather than traditional investing.

The controversy follows Robinhood’s decision in February to abandon its initial attempt at event contracts tied to the Super Bowl, which was scrapped at the request of the CFTC. Despite this, Robinhood moved forward with its March Madness offerings, claiming continued compliance with regulatory guidelines.

Industry Reaction and Market Impact

The introduction of sports-related prediction contracts has ignited debate within the financial and gaming industries. Some market analysts argue that these contracts simply expand investment opportunities, while others see them as an attempt to circumvent gambling laws.

Industry expert Steve Ruddock weighed in on the situation, noting, “I think if they stuck to elections and other prediction-type categories, they probably would have breezed through and there wouldn’t have been much opposition. But once you start treading on entrenched interests’ revenues, you’re going to cause quite a stir.”

The pushback isn’t just coming from regulators. Established sports betting operators, who pay significant licensing fees to offer their services legally, have also expressed discontent over Robinhood’s entry into the space without adhering to traditional gaming regulations.

Despite the scrutiny, Robinhood’s stock has performed well. Following news of the investigation, shares of the company rose by 9% on Monday, reflecting investor confidence in the platform’s ability to navigate regulatory challenges. Year-to-date, Robinhood’s stock has seen a 23% increase.

Future of Prediction Markets in the U.S.

Robinhood’s foray into prediction markets marks a significant moment in the ongoing discussion over how these financial products should be regulated. The CFTC has stated that it “has no legal justification to prevent Robinhood from offering access to these contracts, which are listed on a CFTC-registered exchange.” Still, state regulators like Galvin remain skeptical about their implications for retail investors.

In response to the backlash, Kalshi announced a partnership with IC360, an integrity monitoring firm, to implement responsible gaming measures such as deposit caps, trading breaks, and voluntary opt-outs. Kalshi CEO Tarek Mansour reiterated the company’s commitment to compliance, stating, “From the beginning, we knew the only way to achieve the true potential of prediction markets was to build a market that was as safe, trustworthy, and compliant as possible.”