Futures Meet Sports Betting: How Prediction Markets Are Testing American Gambling Laws

The United States is in uncharted waters. A multi-billion-dollar sector that started quietly has suddenly become a flashpoint for legal disputes between federal and state authorities. At the center of this storm sits Kalshi, a New York-based company that says it operates a federally regulated financial exchange, not a sportsbook. Yet it allows people across all 50 states to wager money on the outcomes of NFL games, NHL matches, and countless other sporting events. The platform’s rapid expansion has sparked questions about which regulator holds actual authority over these innovative trading products.

What makes this situation so complicated comes down to a fundamental question: are sports prediction contracts legitimate financial derivatives, or are they just old-fashioned gambling wearing a fancy disguise?

How Prediction Markets Dodge Traditional Gambling Laws

The answer is everything for prediction markets. These platforms operate under the Commodity Exchange Act, falling under the jurisdiction of the Commodity Futures Trading Commission (CFTC), not state gambling regulators. The CFTC treats products offered by companies like Kalshi as financial derivatives rather than bets. This technical distinction has massive consequences: it allows these platforms to offer sports contracts in every state, including those that explicitly banned online sports wagering.

The Federal Wire Act of 1961, originally passed to combat organized crime, prohibits wire communications from transmitting sports bets across state lines. The law was designed to cut off the American Mafia’s use of telephones to coordinate illegal sports betting operations. However, prediction markets argue their products aren’t bets at all; they’re derivatives trading on financial exchanges. This argument sits at the heart of the legal battle playing out across the country.

Traditional online sports betting must comply with each state’s specific regulations. Most states that legalized sports betting require operators to obtain licenses, pass background checks, and pay licensing fees. As of 2025, 39 states plus Washington D.C. have legalized some form of sports betting. But many haven’t: California, Texas, Hawaii, Georgia, and Idaho still prohibit online sports betting entirely. In Washington State, knowingly transmitting gambling information over the internet is even classified as a felony. These restrictions represent decades of state regulatory authority over gambling activities within their borders.

Prediction markets argue their federally registered derivatives don’t need to follow state restrictions because federal law preempts state gambling laws when it comes to futures and derivatives trading. This preemption argument is the linchpin of their legal strategy across multiple states and court systems.

Why States Are Pushing Back Hard

State regulators are not buying the derivatives argument. They’ve issued cease-and-desist orders against Kalshi in at least eight states, including Nevada, New Jersey, Maryland, Ohio, Arizona, Illinois, Montana, and New York. These enforcement actions have spawned lawsuits calling sports contracts exactly what they appear to be: illegal gambling operations without proper state licensing and oversight.

Massachusetts Attorney General Andrea Joy Campbell filed suit specifically targeting what she called unlicensed sports wagering, emphasizing that sports betting carries substantial addiction and financial harm risks, necessitating strict regulation to protect public health and vulnerable populations. Nevada Gaming Control Board member George Assad stated bluntly: “A sports wager is a sports wager. Every bet made is a contract. You can call it a derivative contract. You can call it a credit default swap, like they did during the housing bubble. Whatever you want to call it, it’s still a sports bet that should be regulated by state gaming authorities.”

State gaming officials worry about losing revenue and market share to nationwide competitors. The Pennsylvania Gaming Control Board warned that prediction platforms “directly threaten established gaming systems.” Licensed sportsbooks generate significant tax revenue for states, often funding education, infrastructure, and problem gambling programs. Prediction markets operating nationwide without equivalent licensing requirements undercut that entire business model, potentially costing states hundreds of millions annually.

Beyond revenue concerns, prediction markets bypass consumer protections accompanying state licensing: operator background checks, substantial licensing fees, responsible gaming requirements, deposit limits, and problem gambling prevention programs. Regulatory arbitrage is the operative phrase: these companies sidestep accountability that other gambling operators must meet, creating an uneven playing field for established players.

Kalshi has initiated legal action in response, filing preemptive lawsuits against Nevada, New Jersey, Maryland, and Ohio, securing preliminary injunctions to keep its services active in some cases. Meanwhile, Massachusetts and Native American tribes in California have pressed their argument that Kalshi’s sports contracts constitute unlicensed gambling requiring state oversight.

The CFTC’s Confusing Non-Stance

The most frustrating aspect for state regulators is the CFTC’s reluctance to take a clear position. The federal regulator has essentially said the issue is a state matter, leaving prediction markets to expand in a legal gray area while states scramble to respond with their own enforcement actions.

Under the Commodity Exchange Act, designated contract markets like Kalshi can self-certify certain products for trading. Rule 40.11 prohibits contracts involving gaming, assassination, terrorism, war, or activity unlawful under federal or state law. It also bars contracts the CFTC determines to be “contrary to the public interest.”

Here’s where it gets murky: the CFTC hasn’t clearly prohibited sports event contracts as gaming, nor has it given them full blessing. This ambiguity is precisely what prediction markets exploit. When the CFTC doesn’t actively block self-certified products, platforms argue they’ve met requirements and can operate legally. Meanwhile, state regulators say the federal government is abdicating responsibility for consumer protection and player safety.

In 2025, the CFTC warned designated contract markets to develop “appropriate contingency planning” and “risk management policies” given ongoing state litigation. This reads less like regulation and more like regulatory surrender, acknowledging that states and courts will ultimately decide the issue. The agency appears unprepared or unwilling to resolve this fundamental question about its own authority.

The Broader U.S. Gambling Regulatory Framework

Understanding this situation requires examining how America regulates gambling overall. The system is fragmented, with federal laws providing a baseline and states handling most specifics. This patchwork approach has created opportunities for regulatory arbitrage that prediction markets now exploit strategically.

The Wire Act of 1961 remains the primary federal restriction on interstate gambling. The 2006 Unlawful Internet Gambling Enforcement Act (UIGEA) made it illegal for financial institutions and payment processors to process payments for unlawful gambling, effectively creating a de facto ban on certain activities by making them economically impractical.

Interpretations have shifted repeatedly, creating tremendous uncertainty throughout the industry. In 2011, the DOJ announced the Wire Act applied only to sports betting, not poker or casino games. In 2019, the DOJ reversed course, claiming it applied to all online gambling activities. These flip-flops created confusion about what’s actually legal and which agencies have jurisdiction.

States built their own regulatory regimes in response to this federal uncertainty. Nevada legalized online poker in 2013 and sports betting in 2010, becoming pioneers in online gaming regulation. Around 35 states now allow online sports betting, though specific rules vary considerably. Some states require casino partnerships, others allow independent operators. This complexity means prediction markets face a patchwork of regulations rather than a coherent national framework, which is precisely their argument for federal preemption.

Where Prediction Markets Stand Today

Despite legal challenges, Kalshi continues to expand largely unchecked. The company’s sports contracts now account for over 90 percent of the platform’s trading volume. Marketing materials explicitly promote sports wagering “in all 50 states.” The company secured a partnership with the NHL, becoming the first U.S. professional sports league collaborating with a prediction market operator, lending mainstream credibility to the platform.

Robinhood offering Kalshi contracts to its retail user base has fueled significant trading volume among everyday investors. Other platforms are following suit. Crypto.com operates similar markets through its Nadex subsidiary. Polymarket faced regulatory challenges but continued operating after federal investigations closed, suggesting a possible regulatory shift toward less hostile federal oversight.

Established sportsbooks like DraftKings and FanDuel began experimenting with event trading products while warning other operators that participation could jeopardize their state gaming licenses.

The Crypto Dimension

Cryptocurrency adds another layer of complexity to prediction market regulation. While Kalshi uses traditional payment infrastructure, Polymarket operates on blockchain using stablecoins like USDC, creating additional questions about whether crypto-based prediction markets fall under CFTC jurisdiction, securities regulation, or other regulatory schemes. A similar question applies to crypto-based gambling platforms.

Polymarket faced significant setbacks in Romania, where authorities blacklisted the platform as unlicensed gambling. This suggests international regulators may take harder lines than U.S. states currently do.

What Legal Experts Predict

Legal experts predict the issue will eventually reach the U.S. Supreme Court by 2027 or 2028. Multiple legal proceedings are pending simultaneously in different courts. Kalshi’s strategy involves filing first in federal court, framing disputes as federal preemption questions rather than state-level battles over contract legality.

The stakes are enormous. If courts side with prediction markets, sportsbooks could lose market share to nationwide competitors without equivalent regulatory burdens. States could lose hundreds of millions in annual revenue from licensed operators. Consumer protections become a major concern when federal derivatives regulation doesn’t mandate responsible gaming requirements.

The Road Ahead

One possible outcome: courts could establish that CFTC-registered platforms can offer event contracts nationwide, preempting state gambling prohibitions for federally regulated operators.

Another scenario: courts could rule that event contracts are inherently gambling and fall outside CFTC authority regardless of how they’re classified, forcing prediction markets to operate under state gambling licenses like traditional sportsbooks.

Congress could intervene with clarifying legislation explicitly defining whether event contracts fall under CFTC or state jurisdiction, creating certainty for all parties involved.

The outcome will shape not just prediction markets but other innovative financial products blurring investment and gambling lines. Until courts or Congress provide clarity, prediction markets will continue operating in legal limbo while state regulators remain engaged in enforcement actions and the CFTC remains on the sidelines of this increasingly complex regulatory battle.