“Yes” or “No”—Is it Betting or Trading? The Regulatory Struggle Over Prediction Markets

Suppose a person wanted to place a risky bet during the NBA Finals but lived in a state that illegalized sports gambling. Traditionally, this gambler might turn to the neighborhood bookie, but newer apps like Kalshi allow users to “trade” money for contracts in any state. (Kalshi, Instagram). Normally, states regulate sports gambling and decide whether to legalize or prohibit it, but prediction markets such as Kalshi and Polymarket are challenging this framework. (Ben Blatt and Amy Fan, NYT). Prediction markets offer products that forecast, plan for, and hedge future events, with the contract’s “price” reflecting traders’ perceived probability of an event’s outcome. (CFTC). This post examines the rise of prediction markets into a multi-million-dollar industry, their growing political influence, and the states’ struggle to regulate this industry.

Gamblers could not have made sports bets nationwide until recently. Until 2017, sports gambling remained illegal in most states until the Supreme Court invalidated the Professional and Amateur Sports Protection Act, permitting states to create sports gambling schemes. (Murphy v. NCAA). While the decision permitted states to determine their own regulatory framework for sports gambling, it did not alter federal law governing futures and commodities, which remain subject to the jurisdiction of the U.S. Commodity Futures Trading Commission (“CFTC”). (Eli France, Timothy Keans, Gary Chodes, NLR). Following Murphy, many states authorized online sportsbooks such as FanDuel and DraftKings, subject to state licensing and taxation requirements. (Ben Blatt and Amy Fan, NYT).

While sports gambling reached new heights, prediction markets began to coalesce. Polymarket launched in 2020, followed by Kalshi in 2021, both in New York. Id.; (Alicia Park, Forbes). Kalshi received national press coverage when a popular contract wagered whether a replacement for Jerome Powell would be announced by December 1, 2021, or another contract that asked whether the unemployment rate would be above 3.5%. (Jesse Pound, CNBC; Bloomberg). Prediction markets allow customers to take a financial position on a yes-or-no, multiple choice, or range of outcomes to a specific event. (CFTC). This allows traders to trade on a variety of events. As of May 2026, Kalshi users can trade on the NBA Finals and the 2028 Democratic nominee for President, while Polymarket users can trade as to whether the U.S. will declassify new UFO files by June 30. (Kalshi; Polymarket).

So, who regulates these trades? Prediction markets say that their events are “derivatives,” a commodity subject to the CFTC’s regulation. (Eli France, Timothy Keans, Gary Chodes, NLR). Before 2024, the CFTC scrutinized Kalshi and Polymarket. Id. In 2022, Polymarket resolved a CFTC enforcement action by agreeing to cease U.S. operations and pay a $1.4 million fine. (David Yaffe-Bellany and Natalie Rocha, NYT). Despite the settlement, U.S. users continued to access Polymarket using VPNs. (David Yaffe-Bellany, William K. Robinson, and Michael J. de la Merced, NYT). On November 12, 2024, the FBI searched the home of Polymarket CEO Shayne Coplan, seizing his electronic devices amid suspicions that the platform violated its settlement agreement. Id. The CFTC opened an investigation and filed suit against Kalshi to block the platform from offering election-related contracts. (Ben Blatt and Amy Fan, NYT).

President Trump’s election has since shifted federal oversight of prediction markets. Shortly before President Trump took office, Kalshi appointed Donald Trump Jr. as a strategic adviser, while his venture capital firm invested in Polymarket, notwithstanding his advisory role at Kalshi. (Ben Blatt and Amy Fan, NYT). In February 2025, acting CFTC chairwoman Caroline Pham called prediction markets a “new frontier . . . that can bring truth to the Information Age.” (CFTC). Following the CFTC’s policy shift, federal prosecutors ended their investigation into Polymarket. (David Yaffe-Bellany and Natallie Rocha, NYT). The CFTC authorized Polymarket to resume operations in the U.S., ending its years-long prohibition on domestic activity. (Eli France, Timothy Keans, Gary Chodes, NLR). The CFTC dropped its election-contract litigation against Kalshi. (Ben Blatt and Amy Fan, NYT). The CFTC’s loosened oversight over prediction markets allowed users to trade on a variety of events, including in states where online gambling remains illegal. (Eli France, Timothy Keans, Gary Chodes, NLR). This online sports gambling is possible due to the CFTC’s exclusive role in regulation event contracts, but some states disagree.

After the CFTC eased regulation of prediction markets, Nevada regulators sent a cease-and-desist letter on March 4, 2025, stating that event-based contracts are illegal unless approved by the Nevada Gaming Commission. (KalshiEX, LLC v. Hendrick). Kalshi sued the Board and Commission, arguing its contracts are “swaps”—derivatives where parties exchange payments based on stock, interest, or commodity prices. (SEC) Kalshi claimed swaps are regulated under the Commodity Exchange Act (“CEA”) and within the CFTC’s exclusive jurisdiction, placing them outside state control. (Eli France, Timothy Keans, Gary Chodes, NLR) The U.S. District Court for the District of Nevada rejected Kalshi’s interpretation. (KalshiEX, LLC v. Hendrick). The court explained that the CEA’s definition of “swap” involves agreements with payments contingent on an event, not wagers or sports betting. Id. “Event” means the sporting contest itself, not its outcome. Id. The court ruled Kalshi’s contracts are outcome-based commodities subject to state gambling laws. Id. The ruling prevents prediction markets from expanding unregulated sports-related contracts, avoiding circumvention of state laws and taxes, and aligns with congressional intent. Id.

States outside of Nevada have also pushed back against prediction markets. (Eli France, Timothy Keans, Gary Chodes, NLR). New York Attorney General Letitia James warned New Yorkers that prediction markets’ event contracts operate without adequate consumer protection, are unregulated, and are unlicensed. (NY AG’s Office). On November 26, 2025, a putative class action filed against Kalshi in the Southern District of New York alleged that Kalshi misused customer funds to facilitate an illegal sports gambling enterprise between January and November 2025. (Pelayo et al. v. Kalshi Inc. et al.). Federal district courts in New Jersey and Maryland have also heard cases akin to the Nevada litigation, with the District of Maryland ruling against Kalshi and the District of New Jersey ruling in Kalshi's favor and agreeing that states cannot regulate prediction markets. (Eli France, Timothy Keans, Gary Chodes, NLR). The Third Circuit affirmed the District of New Jersey’s ruling on April 6, 2026, creating a circuit split (KalshiEX, LLC v. Flaherty). The CFTC issued an advisory amid this uncertainty on March 12, 2026, reaffirming its sole jurisdiction over prediction markets and advising them to mitigate the potential of insider trading and contract manipulation. (CFTC).

Prediction markets have quickly blurred the line between state-regulated sports betting and federally regulated trading platforms. Companies like Kalshi and Polymarket are testing the limits of existing regulatory regimes, prompting legal challenges and divergent state and federal responses. These conflicts underscore the unsettled nature of governance over prediction markets. As the dust settles, the fight over who gets to control prediction markets is just starting, and the final word may come from the nation’s highest court.