Prediction markets, once a niche academic experiment, are colliding with US gambling laws, state regulators and a cautious Commodity Futures Trading Commission as volumes surge and courts weigh who has authority over bets on everything from elections to sports and world events.
In a webinar hosted by FIA’s Legal & Compliance Division on 15 January, derivatives lawyers said the rapid expansion of event-based contracts is forcing a legal reckoning over whether they should be treated as federally regulated derivatives or as gambling subject to state or tribal law.
“The crux of the issue is, are they a derivative product, or is it gambling?” said Ian McGinley, a partner at Sidley Austin LLP and former director of enforcement at the CFTC.
Prediction markets allow traders to buy and sell yes/no contracts that pay out based on the outcome of a future event, ranging from who will win a presidential election to whether a sports team will advance in a tournament. Supporters argue the markets aggregate information more accurately than polls or forecasts, while critics say they amount to sports betting repackaged as finance.
Trading volumes have surged over the past two years. Contracts tied to the 2024 US election propelled prediction markets into the mainstream, while sports-related contracts proliferated in 2025. McGinley said estimated trading volumes reached about $40 billion last year.
Platforms including Kalshi and Polymarket offer event contracts to US customers through federally regulated exchanges, known as designated contract markets, or DCMs.
The legal question at the heart of the debate is whether event contracts qualify as “commodity interests” under the US Commodity Exchange Act. If they do, the CFTC has exclusive jurisdiction, pre-empting state gambling laws. If they do not, state regulators may intervene under their own betting statutes.
“We have the federal pre-emption, and that is really the core of the litigation that is happening right now,” said Peter Malyshev, partner at Cadwalader, Wickersham & Taft, at the time of the webinar.
“The exchanges make an argument that, look, we are a registered DCM, such as Kalshi, for example, and therefore a DCM can operate as a federally registered exchange in all 50 states. Some states, however, are making an argument that they do not believe these are commodities or hold commodity interests, that they are gambling contracts that are not subject to the federal pre-emption.”
Several states have issued cease-and-desist letters to platforms offering contracts for sports-related events, arguing that they operate as unlicensed sportsbooks. Those actions have triggered a wave of litigation, much of which is now playing out in federal courts.
At the same time, the CFTC has stepped back from aggressive enforcement. Michael Selig, who became the agency's chair in December, said during his confirmation process that the agency would defer to the courts on whether event contracts constitute prohibited gaming, particularly while litigation remains unresolved.
That marks a departure from earlier CFTC efforts to block such products. In 2011, the agency barred political event contracts proposed by Nadex, arguing they constituted gaming and were contrary to the public interest. More recently, the regulator sought to prevent Kalshi from listing contracts tied to congressional elections, only to lose in federal court.
In that case, a federal judge ruled that the contracts were based on elections themselves, which are neither an unlawful activity nor gaming, allowing them to trade. The CFTC later dropped its appeal, clearing the way for the listing of election contracts during the 2024 campaign.
Malyshev said the decision underscored how finely courts are parsing the Commodity Exchange Act, which contains broad but often ambiguous definitions.
“The devil is really in the definitions,” he said, noting that terms such as gambling, wagering and gaming are used inconsistently across federal and state law.
A central regulatory test is whether contracts are “readily susceptible to manipulation,” a core principle that exchanges must satisfy when listing new products. Contracts tied to national elections or major professional sports leagues may be harder to manipulate than those based on obscure or thinly traded events, Malyshev said.
Concerns over misuse of non-public information have also intensified as markets grow. McGinley cautioned that insider-trading prohibitions apply just as forcefully in prediction markets as in traditional futures and options markets.
“If you misappropriate government information and trade on it, that’s no different here,” he said.
Despite the legal uncertainty, neither lawyer on the webinar expects prediction markets to disappear, saying the scale of trading activity and growing public visibility make outright prohibition unlikely.
“These contracts aren’t going away,” Malyshev said. “The question is where the lines get drawn.”
The most likely outcome, he said, is a series of court rulings clarifying the boundary between derivatives and gambling, followed by narrowly tailored CFTC guidance.
“I just do not see a possibility of them being shut down,” Malyshev said. “They may be pared back to leave some space for the states and the tribal authorities, but it's extremely unlikely that there will be a shutdown.”
View the webinar and accompanying slides for more information.
