Prediction Markets And US Legislation

Prediction markets used to feel like a niche corner of the internet built for political obsessives, finance nerds and probability addicts. Now, they are one of the fastest-growing and most controversial parts of the US betting and trading landscape.

Platforms like Kalshi and Polymarket allow users to trade on real-world outcomes through event contracts. These are usually simple yes-or-no markets: Will a candidate win an election? Will a team win a game? Will inflation hit a certain level? Will a celebrity win an award?

Supporters call them financial tools for forecasting public events. Critics call them sports betting in a federal disguise. That argument is now at the center of US legislation.

The Commodity Futures Trading Commission is trying to build a federal framework for the industry, while state regulators, casino lobbyists, Native American tribes and lawmakers argue that sports-related prediction markets should be treated like traditional gambling.

The question is no longer whether prediction markets exist. They clearly do. The question is who gets to regulate them - Washington or the states?

Prediction markets are online exchanges where users trade contracts tied to the occurrence or non-occurrence of specific events. If a “Yes” contract trades at $0.60, that price can be read as the market giving the event roughly a 60% implied chance of happening.

Legally, platforms such as Kalshi argue these contracts are not gambling products. They are event contracts, regulated as derivatives under the Commodity Exchange Act. That puts them under the authority of the CFTC, not state gambling regulators.

That distinction is massive. If prediction markets are federally regulated swaps, states may have limited power to block them. If they are sports bets, state gaming commissions and tribal authorities have a much stronger claim.

The latest CFTC proposal does not appear designed to destroy the industry. Instead, it aims to create a clearer framework for deciding which event contracts should be allowed and which should face tougher scrutiny.

Most importantly, the proposal would continue to allow many sports-related markets, including contracts based on game results, scores, spreads, tournament advancement and similar outcomes. That is a major win for prediction market operators.

However, the CFTC would have more room to review markets especially vulnerable to manipulation. That includes contracts tied to player injuries, officiating decisions, player ejections, fighting, high school sports and first-pitch baseball outcomes.

The logic is simple. A market on who wins the Super Bowl is broad and public. A market on whether a pitcher throws a fastball on the first pitch is much easier for one person to influence. At that point, “prediction” starts to look dangerously close to an integrity trap.

So the CFTC’s position seems to be: let legitimate markets move forward, but clamp down where manipulation risk is obvious.

Congress is also circling the industry. Several bills introduced in the 119th Congress would restrict or ban certain types of event contracts, especially those tied to sports, casino-style games, elections, war, terrorism, assassination, government action and military activity.

Other bills focus on insider trading and public integrity. These proposals would stop certain federal officials, congressional employees, political appointees and senior government workers from trading prediction market contracts tied to political outcomes, government policy or government action, especially when they have access to material nonpublic information.

That concern is not theoretical. A fan trading on a football game is one thing. A government official trading on a military action, policy decision or election-related outcome is something else entirely.

The US legal landscape is not unified. It is a patchwork of lawsuits, cease-and-desist orders, federal injunctions and regulatory warnings.

At the center of the fight is one unresolved issue: the CFTC claims exclusive federal authority over event contracts as swaps, while state gaming regulators argue that sports prediction markets are really sports wagering and should fall under state gambling law.

Several states have already taken formal action.

The state of Nevada is one of the toughest markets for prediction platforms. The Nevada Gaming Control Board issued a cease-and-desist order to Kalshi, and court rulings allowed the state’s temporary ban on sports markets to take effect.

New Jersey, however, moved in the opposite direction. Courts sided with Kalshi, with the Third Circuit holding that sports event contracts fall within the swap definition of the Commodity Exchange Act. That was a major win for the federal preemption argument.

Maryland remains more dangerous for prediction markets. A federal judge denied Kalshi’s attempt to block state enforcement, finding that state gaming authority could coexist with CFTC regulation.

Tennessee issued cease-and-desist letters to Kalshi, Polymarket and Crypto.com, but Kalshi won early court relief after a judge found it was likely to succeed because sports event contracts could be treated as swaps.

Connecticut, Arizona and Illinois have also taken strong action, with the CFTC suing all three states to block enforcement. Arizona went especially hard, filing criminal allegations against Kalshi over illegal gambling and election wagering before a federal judge temporarily halted the case.

Other states are active but less aggressive. Michigan filed a civil enforcement action against Kalshi. Massachusetts saw a judge order Kalshi to block users, though that order was paused pending appeal. Ohio sent cease-and-desist letters but had not escalated as aggressively.

Meanwhile, some major states had no formal action in the provided breakdown, but still carry legal uncertainty. California has no legal sports betting and may create future compliance issues through its Digital Financial Assets Law. Texas had no documented formal action, though sports betting remains illegal there. Florida permits sports betting through a tribal compact and had not taken formal action. New York had no cease-and-desist order, but private litigation and digital asset rules could still create friction.

Sports are the reason this debate has become so heated.

Prediction markets existed before the sports boom, but sports contracts changed the scale. They attract volume, feel familiar to sportsbook users and directly compete with licensed operators.

That is why casinos, sportsbooks, state regulators and tribal gaming authorities are furious. Their argument is simple: if users are risking money on sports outcomes, then it is sports betting - and should follow the same rules as DraftKings, FanDuel or any licensed sportsbook.

Prediction market operators disagree. They argue that they do not set odds or act as bookmakers. They operate exchanges where users trade against each other, with prices moving according to supply and demand.

In other words: sportsbooks take bets; prediction markets list contracts.

Sports may be the loudest issue, but insider trading may be the scariest.

Prediction markets can cover politics, war, elections, corporate events, policy decisions and military action. That creates obvious risks when insiders have information the public does not.

A coach knowing an injury update, a campaign worker knowing internal polling, a government official knowing a coming decision, or a military insider knowing an operation is coming could all create unfair trading opportunities.

That is why proposed legislation focuses heavily on material nonpublic information and whether public officials should be allowed to trade event contracts at all.

Prediction markets are no longer a quirky forecasting experiment. They are becoming a major business, a sports betting rival, a political data source and a regulatory headache all at once.

The CFTC’s proposal suggests the federal government wants to regulate the industry, not ban it. Most broad sports markets may survive, while contracts tied to injuries, officiating, youth sports and easily manipulated outcomes could face tougher scrutiny.

But the states are not backing down. Nevada, Maryland, Arizona, Connecticut, Illinois, Michigan, Massachusetts and Ohio show that local regulators still see prediction markets as a threat to gambling law. New Jersey and Tennessee show that courts may protect operators when event contracts are treated as federally regulated swaps.

Until the law catches up, though, prediction markets will remain exactly what they are now: part innovation, part loophole, part lawsuit and part gold rush.