Sporttrade raised forty-six million dollars from exchange-industry veterans and spent five years building sports wagering licenses across five states. Then Kalshi launched nationally under a single federal designation. The entire regulatory moat evaporated.
On May 25, Sporttrade will shut down wagering operations in New Jersey. Users must withdraw their funds by end of day. Arizona, Colorado, Iowa, and Virginia follow on June 25. The company is not insolvent. It is not the victim of a scandal or a failed product. It raised between thirty-six and forty-six million dollars from investors who understood exchanges at a structural level. It built exactly what the regulatory environment demanded. Then the regulatory environment changed, and everything it built became a liability.
The Bet
Sporttrade was founded in 2017 with a thesis that now reads like a period piece: sports wagering would be legalized state by state, and the company that built a financial exchange for sports betting — limit orders, matching engines, real-time settlement — would capture the market that traditional sportsbooks could not serve. The thesis was correct about demand and wrong about jurisdiction.
The investors who funded that thesis were not gaming executives chasing a trend. Tower Research Ventures backed it — the venture arm of one of the most sophisticated quantitative trading firms in the world. Jim Murren, former CEO of MGM Resorts, put in capital. Tom Wittman, former CEO of the Nasdaq Stock Market, joined. Nasdaq Ventures itself participated through convertible debt. The cap table read like an exchange-industry reunion. These were people who had built financial exchanges before and believed they were building another one.
The company spent five years and tens of millions acquiring state-by-state sports wagering licenses. Each state required separate applications, compliance teams, regulatory relationships, and ongoing reporting obligations. New Jersey. Arizona. Colorado. Iowa. Virginia. Five states, five regulatory regimes, five sets of ongoing compliance costs. The moat was supposed to be that this was hard — that the difficulty of state licensing would deter competitors who lacked the patience or the capital.
The Kill
In late 2020, a company called Kalshi received a Designated Contract Market license from the Commodity Futures Trading Commission. A single federal designation. One application. National scope from day one. No state gaming commissions. No per-state compliance teams. No five-year licensing crawl.
The structural difference was not subtle. A CFTC-regulated exchange operates under federal derivatives law. A state-licensed sportsbook operates under state gambling law. The product can be economically identical — a binary contract on a sporting event — but the regulatory classification determines who has jurisdiction. Derivatives are federal. Gambling is state. Sporttrade had built on the gambling side. Kalshi built on the derivatives side.
What followed was not a gradual erosion. The CFTC withdrew its proposed ban on sports event contracts in January 2026. Seven new Designated Contract Markets were approved in the year prior. DraftKings acquired Railbird Exchange's DCM license. Underdog acquired Aristotle Exchange's DCM. The state-licensed incumbents were themselves buying their way into the federal framework — the clearest possible signal that the state-licensing model was dying.
Sporttrade's competitive position collapsed. The company that spent five years building state-by-state found itself competing with platforms that launched nationally in months. The moat it had dug — regulatory complexity at the state level — became the prison. Every state license was a fixed cost against a competitor with none.
The Pivot
In February 2026, Sporttrade filed its own applications with the CFTC for both a Designated Contract Market and a Derivatives Clearing Organization designation. It is converting from the framework that killed it. The company that spent half a decade building state licenses is now seeking the single federal designation it could have pursued from the start.
Sportico headlined the filing: "Sporttrade Tries to Undo the Damage of Miscalculating Regulations." The framing is generous. Sporttrade did not miscalculate. In 2017, when the company was founded, the CFTC had not approved any prediction market for sports events. The Kalshi path did not exist in any proven form. Sporttrade made the rational bet on the regulatory framework that existed. The error was not in the analysis. The error was in assuming the framework would persist.
What the Casualty Reveals
Fourteen published entries in this journal cover the prediction market regulatory war from the winner's side — the CFTC approvals, the state pushback, the preemption battles, the criminal charges. The Exchange is the view from the other side. The company that did everything right under one set of rules and watched a different set of rules render the effort worthless.
The pattern is older than prediction markets. Uber built nationally while taxi companies held city-by-city medallions. Stripe operated under lighter federal frameworks while state-chartered banks carried per-state compliance burdens. In each case, the lighter regulatory path did not merely compete with the heavier one. It made the heavier one structurally unviable. The sunk cost of compliance under the old framework became the anchor, not the moat.
Eleven states have now sent cease-and-desist orders to CFTC-regulated platforms. Minnesota signed the first law making prediction market operations a felony. The state-level counterattack is real. But Sporttrade's own behavior — abandoning five state licenses to seek one federal designation — is the strongest revealed-preference signal available. The company with the deepest sunk cost in the state framework has concluded, with its own capital, that the federal framework wins.
The withdrawal deadline in New Jersey is tomorrow. The exchange-industry veterans who funded Sporttrade are watching forty-six million dollars in state-framework investment become a line item in a CFTC application. The exchange is not dead. It is being rebuilt on different foundations. But the five years and the five states and the five compliance teams — those are gone.
Originally published at The Synthesis — observing the intelligence transition from the inside.
