A simple survey of interests across the gaming spectrum will render a heavy support on the side of “prediction markets are just gambling” and ought to be supervised, regulated, and taxed by states as most gambling is and has always been. In a recent poll we covered, 61% of Americans had the sentiment that prediction markets were merely gambling, a difference without much distinction from standard gambling. It’s even higher in other surveys.
In the arena that matters most, legal, prediction markets regulation has exploded into a high-stakes clash between federal authorities and state governments. The battle is over regulatory primacy between state gaming regulators and sportsbooks and casino operators bound by them and the Commodity Futures Trading Commission (CFTC) and prediction markets operating under a very pro-business administration. Or, if we’re cutting to the chase, it’s about who gets the cut of the money.
This nonstop legal battle threatens to slow the rapid growth of event contract markets that let retail and institutional traders alike bet on everything from election outcomes to sports results and economic indicators. As trading volumes surge past tens of billions of dollars, headed toward what same analysts sees as one trillion dollars in 2030, fragmented legal rulings create uncertainty that chills investment and product development.
Platform leaders like Kalshi and Polymarket deliver real-time price discovery on future events, yet government regulators at different levels cannot agree on who calls the shots. While the CFTC asserts exclusive jurisdiction, states are fighting to protect their rights to regulate all gaming in their jurisdiction and take in increasing amounts of tax revenues. The resulting turf war risks turning a promising, global financial innovation into a victim of bureaucratic gridlock. In manners of technology and market innovation, the U.S. has typically been known to favor growth over regulation, at least relative to other nations.
Prediction Markets Surge Despite Regulatory Uncertainty
Event contracts have transformed from niche academic tools like the Iowa Electronic Markets (IEM) into mainstream trading vehicles. Traders buy and sell dynamic futures contracts that pay out based on whether specific outcomes occur, creating efficient forecasts that often outperform traditional polls and analyst anticipated probabilities. Kalshi, a CFTC-regulated exchange, now offers sports contracts alongside political and economic ones, driving massive liquidity. Polymarket has captured global attention with high-volume markets on news and culture. Quite famously, Polymarket out predicted all major polls in the 2024 U.S. Presidential election.
Industry volumes have reached tens of billions in recent months, reflecting strong demand for skin-in-the-game, crowd-wisdom forecasting. Yet this aggressive boom, and the product innovations its fostering, collides with outdated rules designed for simpler derivatives or state-controlled betting. Because prediction market platforms currently operate under federal derivatives law, they often bypass state age restrictions or tax structures that apply to traditional sportsbooks
In sports event markets, where the difference with sportsbook betting seems like a distinction without a difference, the legal clashes are particularly heightened. Remembering that it was but 8 years ago that a SCOTUS ruling opened up sports betting every state, with several, then several more, and now a majority jumping headlong into legalized sports betting with DraftKings, FanDuel and other licensed operators. And with it, the tax money began to flow.
If you think sports betting operators were upset at federally-regulated platforms like Kalshi and Polymarket eating into their sports betting users, you should see state legislators when tax revenue is being threatened. Current estimates are $1 billion being lost per year in collective state tax revenues due to bettors moving to prediction markets.
The CFTC Claims Exclusive Jurisdiction to Foster Responsible Growth
Current CFTC Chairman Michael Selig has taken a strong stand for federal oversight. In early 2026, the agency withdrew prior proposals that would have restricted political and sports contracts, citing the need for a coherent framework aligned with the Commodity Exchange Act (CEA). Selig argues that event contracts, including sporting event contracts, qualify as swaps, placing them squarely under exclusive CFTC authority.
This status-quo position enables full nationwide access and uniform rules on manipulation, surveillance, and public interest. The agency has filed lawsuits against multiple states to block enforcement of gambling laws against CFTC-registered platforms. The CFTC and supporters of its current stance assert this nationwide market prevents a patchwork of government bureaucracy, rules, and taxation that would fragment liquidity and invite regulatory arbitrage.
Recent staff advisories emphasize core principles of market transparence and integrity, like contracts not being readily susceptible to manipulation. Platforms must maintain real-time monitoring and flagging, especially for sports outcomes. The CFTC asserts that their guidance aims to balance rapid innovation with market safeguards, yet ongoing litigation with numerous states is creating hesitation among developers considering new product launches.
Key Elements of CFTC’s Approach to Event Contracts
| Aspect | CFTC Requirement |
|---|---|
| Classification | Event contracts treated as swaps under CEA |
| Manipulation Risk | Real-time surveillance; avoid single-actor outcomes |
| Public Interest | Prohibit contracts on assassination, terrorism |
| Listing | Self-certification or prior approval with analysis |
States Push Back to Protect Gambling Revenues and Authority
More than a dozen states have launched enforcement actions or legislation targeting prediction platforms. Gaming regulators view sports event contracts as illegal betting that undercuts licensed sportsbooks and siphons tax dollars. Some states introduced outright bans or new licensing requirements aimed at reasserting control.
As you might imagine, sportsbook operators living under state-by-state regulatory control, 21+ age gates, and often heavy taxation (51% tax rate in New York) do not see the playing field as level with Kalshi and Polymarket relieved of these same hurdles. Tribal gaming interests have joined the fray, arguing that federal expansion violates the Indian Gaming Regulatory Act. This resistance has produced cease-and-desist letters and multi-state litigation currently being heard in district courts across the country.
Because states traditionally regulate gambling as a police power, they resist federal preemption claims. Divergent court decisions have created confusion, forcing companies to limit offerings or face shutdown risks in key markets. Additionally, digital advertisers, such as Google, have begun disallowing prediction market advertising in states like Ohio who’ve taken initial steps to ban Kalshi and Polymarket trading.
Major Lawsuits Define the Battle Lines
Kalshi has become a central player in testing federal preemption. In cases across Nevada, New Jersey, Tennessee, and Arizona, where states have voted in outright bans on prediction market contracts, if not seeking criminal charges against Kalshi, like in Arizona, federal courts have often granted preliminary injunctions blocking state enforcement. The Third Circuit affirmed that CEA grants exclusive jurisdiction over swaps on designated contract markets.
The CFTC and Department of Justice have sued states including Connecticut, Illinois, and Arizona to reinforce this view. These actions argue that state gambling laws cannot invade CFTC-regulated territory. Platforms continue operating amid appeals, but the uncertainty of future legal outcomes deters venture capital and product expansion.
At PolyPunter we believe there are three possible outcomes for legal resolution: (1) Congress passes a new law in detail defining the CFTC domain and prediction markets, (3) SCOTUS becomes the the final arbiter of these legal clashes based on existing law, or (3) states and prediction markets come to a voluntary turf-war settlement with a solution that places sports markets especially under state regulatory control but remaining category markets not so. And we feel pretty strongly option number three is the most likely.
Selected Court Outcomes in Prediction Markets Cases
| State/Jurisdiction | Key Ruling | Impact |
|---|---|---|
| Third Circuit (NJ) | Affirmed injunction for Kalshi | CEA preemption recognized |
| Arizona Federal Court | Preliminary injunction granted | Blocked state enforcement |
| Tennessee | Temporary restraining order | Allowed continued operations |
| Ongoing Multi-State Suits | CFTC interventions (IL, CT, AZ) | Seeks nationwide clarity |
Courts continue to shape the landscape through these decisions, but all the appeals only prolong the conflict.
Innovation Suffers Under Regulatory Fragmentation
Developers can hesitate to build advanced features and put resources into product innovation when legal risks loom. Companies may pour resources into compliance and litigation instead of improving algorithms, user interfaces, or risk management tools.
This isn’t to say the larger, well-financed ventures can’t spend on both, but smaller startups face especially steep barriers, as they lack the legal teams to navigate multi-jurisdictional threats. And multi-party competition is a key driver of innovation in any market.
Product innovation slows when platforms must self-censor contract types to avoid state crackdowns. For example, nuanced economic or cultural markets might expand faster without constant threats of enforcement actions. Capital allocation shifts toward defense rather than research into AI-driven forecasting or better liquidity mechanisms.
Traders also experience inconsistent availability across state lines, or threats of losing access to their existing portfolios reducing overall market commitments and depth. This fragmentation prevents the full wisdom-of-crowds benefits that unified national markets with established legal standing could deliver. Passionate advocates for these platforms (such as all of us at PolyPunter) see tremendous potential being wasted while regulators bicker over jurisdiction. This is true for any market. Legal conflicts and opaque regulations hamper innovation.
This isn’t to argue for a Wild West with zero government oversight. But rather, some type of conclusion to the ongoing battles that provides long-term stability and integrity, inviting in strong, long-term consumer and capital interest.
Recent CFTC Proposals Signal a Path Toward Clarity
In June 2026, the CFTC released a detailed notice of proposed rulemaking that would allow most sports event contracts while prohibiting high-risk types such as those involving individual player injuries or officiating calls. This structured framework evaluates whether contracts involve enumerated activities contrary to the public interest. Rather than disavowing sports event contracts as legitimate CFTC concerns, the Commission essentially ruled that some proposition type sports bets are outside their domain, but the main remain under their aegis.
The proposal builds on earlier advisories and seeks public comment to refine rules. While the CFTC independently moves toward greater certainty, states and tribal groups continue to oppose the measures, arguing they encroach on traditional gambling regulation. Stakeholders on all sides should prioritize workable compromises that protect consumers and promote truth-seeking markets.
Transitioning to unified federal oversight would unlock capital, spur technological advances, and deliver superior information tools to the public. Delaying this shift only entrenches inefficiency and invites more wasteful legal battles. The coming months will prove decisive as volumes climb and pressures mount for resolution, though as we mentioned, we do think ultimate resolution will require some “tithing” to the states in terms of control over, likely, sports event specific markets.
References
- Norton Rose Fulbright: Prediction Markets at a Crossroads
- CFTC Press Release on Exclusive Jurisdiction
- CFTC NPRM on Event Contracts (June 2026)
- Sidley: CFTC Signals Rulemaking
- Steptoe: State and Federal Regulators Face Off
- ESPN: CFTC Proposes Rules on Sports Contracts
- Reuters: CFTC Proposes New Rules
- Kalshi Official Site
- Polymarket Official Site
- YouTube: Legal Battle Over Prediction Markets
- Multistate: State Actions and Tax Revenue
