Things are heating up in the world of online predictions, folks! The state of Tennessee recently sent a clear message to some big players in the prediction market space: cool your jets, especially when it comes to sports-related contracts. Authorities in the Volunteer State have intensified their efforts against platforms like Kalshi, Polymarket, and Crypto.com, ordering them to halt access for Tennessee residents and close out all sports event positions by the end of January. The core issue? Tennessee sees these offerings as unregulated wagering products, arguing they don’t meet the state’s stringent licensing and consumer protection standards.
It’s a classic showdown of state versus federal interpretation, and it’s making waves across the nation. The Tennessee Sports Wagering Council firmly believes that any platform accepting money on athletic outcomes must secure a license under the Tennessee Sports Gaming Act. They contend that simply calling these products “event contracts” doesn’t change their fundamental nature as bets. Moreover, state officials are raising flags about the lack of essential safeguards often found with state-approved operators, such as robust age verification, tools for responsible gaming, and strict anti-money laundering (AML) protocols. These are crucial elements designed to protect players and ensure the integrity of the market.
The directives issued in early January aren’t just polite requests. These companies face serious consequences if they don’t comply. They’re expected to cease all Tennessee-based activities, cancel open sports contracts for local users, and return funds by January 31st. Ignoring these orders could trigger escalating fines, starting at $10,000 for a first offense and potentially rising to $25,000 for repeat violations. The council has even hinted at pursuing injunctions in state court and referring cases to law enforcement, which could lead to misdemeanor or even felony charges depending on the severity of the infractions.
Decoding Prediction Markets: More Than Just a Hunch
So, what exactly are these “prediction markets” causing such a stir? At their heart, prediction markets are platforms where participants trade contracts based on the outcomes of future events. Think of them as a fascinating blend of crowdsourcing and financial trading. Instead of just a few experts, a large number of traders “vote” with their money, causing the price of contracts for various outcomes to fluctuate. This dynamic pricing effectively turns the share price for each outcome into a collective, crowdsourced estimate of that outcome’s probability. They’re used for everything from election results and economic trends to sports events and even pop culture predictions.
Proponents argue that these markets serve legitimate economic functions, fostering price discovery, enabling risk management (like hedging against potential losses), and aggregating information more efficiently than traditional methods. For instance, a farmer might buy a weather outcome contract to offset potential crop losses from a drought. They’re similar to futures markets for commodities, where traders bet on the future price of an asset, but in prediction markets, the “asset” is the outcome of a specific event. Many prediction markets operate using event contracts, a type of financial derivative where the payout depends on a specified event. Derivatives, in general, are financial instruments whose value is derived from an underlying asset or event. They can be used for both hedging (managing risk) and speculation (making a financial “bet”).
The key differentiator, according to the companies involved, is their regulation by the Commodity Futures Trading Commission (CFTC). The CFTC grants these exchanges permission to operate nationwide as Designated Contract Markets (DCMs), treating their offerings as federally supervised derivatives. This federal oversight is where the jurisdictional clash truly ignites. These companies argue that since they are regulated by the CFTC under the Commodity Exchange Act (CEA), state-level gambling laws should not apply, a legal concept known as federal preemption.
Tennessee’s Concern and the Broader State Picture
Tennessee’s firm stance isn’t an isolated incident. The state operates a unique online-only sports betting market, which means there are no physical casinos or racetracks for wagering. All legal sports betting must occur within Tennessee borders through licensed mobile apps and websites, verified by geolocation. The Tennessee Sports Wagering Council is the sole authority for licensing, enforcement, and compliance in this space, keenly focused on maintaining a safe, fair, and transparent environment. They highlight that licensed sportsbooks are required to hold reserves to pay out winnings, protect consumer information, and strictly prohibit individuals under 21 from wagering. These are the very protections they feel prediction markets are sidestepping.
The broader US sports betting landscape has witnessed explosive growth since the Supreme Court overturned the federal sports gambling ban in 2018, allowing states to set their own regulations. The US sports betting market was estimated at a hefty $17.94 billion in 2024 and is projected to surge to $33.18 billion by 2030, with online platforms dominating the revenue. This massive growth, while economically beneficial for many states, also brings heightened concerns about responsible gaming and the potential for increased gambling addiction, an issue drawing more public health attention. This context underscores why state regulators are so vigilant about what they perceive as unlicensed wagering. Currently, 39 US states have some form of legalized sports betting.
The Growing Prediction Markets Ecosystem
To understand why states are so concerned, you need to appreciate just how quickly prediction markets have grown. Kalshi and Polymarket combined hit nearly $40 billion in trading volume during 2025, representing approximately 400 percent year-over-year growth. Kalshi alone was on pace to reach $8.4 billion in notional trading volume for January 2026, with the platform’s CEO announcing the company had crossed a $100 billion annualized run rate.
Polymarket’s journey back to U.S. markets has been particularly notable. After settling with the CFTC in 2022 and paying a $1.4 million penalty for operating without proper registration, the platform was blocked from serving American users. But in July 2025, <a href=”https://blockworks.co/news/polymarket-qcex-acquisition”>Polymarket acquired QCEX for $112 million</a>, gaining the CFTC licenses it needed to return. The company began gradually granting access to its U.S. app to users on a waiting list starting in December 2025, and Tennessee’s cease-and-desist letter appears to be the first known state-level enforcement action specifically targeting Polymarket.
The market opportunity has attracted major players from the traditional sports betting world. DraftKings launched DraftKings Predictions across 38 states in December 2025, offering financial event contracts in all active states and sports markets in jurisdictions where it lacks a sportsbook license. FanDuel followed days later with FanDuel Predicts, rolling out in five states initially with plans for broader expansion in 2026. Both platforms partnered with established derivatives exchanges, DraftKings with Kalshi and FanDuel with CME Group, to offer CFTC-regulated products.
Robinhood has become perhaps the most aggressive distributor of prediction markets, accounting for more than 50 percent of Kalshi’s trading volume as of late 2025. The partnership has been enormously successful for Robinhood, with the company reporting approximately $300 million in annualized revenue from prediction markets, making it one of the fintech firm’s fastest-growing business lines. More than 9 billion contracts have traded on Robinhood’s platform since the March 2025 launch, with over 1 million customers participating. The success has prompted Robinhood to pursue its own CFTC licenses through a joint acquisition of LedgerX, potentially allowing the company to offer proprietary prediction markets rather than solely distributing Kalshi’s products.
The explosive growth extends beyond sports. Analysts at Eilers & Krejcik Gaming project that prediction markets could hit $1 trillion in annual trading volume by the end of the decade if current growth trajectories continue. Sports would account for approximately $435 billion of that total, with financial and crypto predictions generating $310 billion, news and current events $160 billion, and culture and other categories making up the remainder. For context, Americans placed $150 billion in bets through legal sportsbooks in 2024, meaning mature prediction markets could potentially handle handle-equivalent volumes approaching 60-80 percent of the current licensed sports betting market.
Why States Are Fighting Back
Follow the money, and you’ll understand why states are so worked up about prediction markets. Tennessee collected taxes on over $305 million in sports betting wagers during July 2025 alone from its 12 licensed operators. That tax revenue funds educational scholarship programs, local infrastructure projects, and responsible gaming initiatives. When platforms operate in the state without licenses or paying the 20 percent privilege tax, they’re essentially siphoning off potential revenue that would otherwise flow to state coffers.
This concern isn’t unique to Tennessee. At least ten other states have issued cease-and-desist letters or taken legal action against prediction market platforms over the past year. Even states that haven’t yet taken direct action against prediction markets have issued warnings to their licensed operators. Illinois, for instance, cautioned that sportsbook licensees could jeopardize their licenses by partnering with prediction markets, even in other states.
The American Gaming Association, which represents major casino operators like MGM and Caesars, has mounted a campaign against prediction markets. The trade group argues these platforms represent unfair competition that undermines state-regulated gaming frameworks. The dispute became so contentious that DraftKings, Fanatics, and FanDuel all left the AGA over its opposition to prediction markets, choosing instead to launch their own prediction offerings.
Tax implications cut both ways, though. Some prediction market advocates point out that requiring bettors to itemize and declare winnings under traditional sports betting tax structures could actually push users toward unregulated black markets, offshore platforms, or prediction markets operating under different regulatory frameworks. Congress’s Joint Committee on Taxation estimated that proposed tax changes to sports betting deductions could raise $1.1 billion in revenue, but critics worry the actual amount could be significantly less if bettors migrate to alternative markets.
The Battle for Jurisdiction: Kalshi’s Nationwide Legal Marathon
Kalshi, a federally regulated derivatives exchange since 2020, has found itself at the forefront of this legal and regulatory tug-of-war. The company has spent the past year engaged in numerous clashes with state regulators across the country, firmly asserting its status as a designated contract market under the CFTC’s exclusive jurisdiction. Its argument is simple: these are financial derivatives, not gambling. Kalshi offers event contracts on a wide array of topics, including politics, economics, and even pop culture, but its expansion into sports-related contracts has particularly irked state gaming authorities.
States like Arizona, Illinois, Ohio, Nevada, New Jersey, Maryland, Montana, and Massachusetts have all taken action against Kalshi, issuing cease-and-desist orders. Arizona, for example, explicitly stated that there’s “no meaningful difference” between sports trading and sports betting, viewing Kalshi’s contracts as unlicensed event wagering. Kalshi has consistently pushed back, often taking these states to federal court. In a notable development, a federal judge in Connecticut temporarily halted the state’s enforcement against Kalshi, allowing its sports event contracts to remain available while litigation continues. This temporary reprieve highlights the complexity and ongoing nature of these legal battles, with courts deliberating whether federal oversight truly preempts state gambling laws. Kalshi has even faced a nationwide class-action lawsuit from users alleging it operates as an illegal sportsbook.
Despite the regulatory scrutiny, Kalshi has seen significant activity. The company reported a record monthly trading volume of $4.54 billion in November and recently secured a funding round that valued it at $11 billion. This financial backing underscores the high stakes involved and the belief in the long-term viability of prediction markets, even amidst legal challenges.
Polymarket’s Resurgence and Crypto.com’s Expanding Footprint
Polymarket’s journey is another compelling narrative in this unfolding drama. After a previous settlement with the CFTC in January 2022 that saw it block US users, the blockchain-based prediction market platform made a strategic move to re-enter the American market. In a significant step, Polymarket acquired QCX for $112 million, effectively securing a Commodity Futures Trading Commission-regulated exchange and clearinghouse. This acquisition paved the way for Polymarket to serve US customers in compliance with federal regulations, marking a “regulatory redemption story” as some have called it. The platform operates automated markets on Polygon, where traders can stake stablecoins on binary outcomes ranging from elections to sports. Polymarket has also forged an information partnership with X (formerly Twitter), further expanding its reach and influence.
Crypto.com, a major player in the digital asset space, is also actively engaged in the prediction market arena. Beyond being targeted by Tennessee, its affiliate, Crypto.com | Derivatives North America (CDNA), is a CFTC-registered exchange and clearinghouse. This allows them to offer event contracts that integrate macroeconomic data, financial markets, and corporate outcomes. Interestingly, Crypto.com has partnered with Hollywood.com to launch entertainment-focused prediction markets, offering a federally compliant way for fans to predict outcomes related to movies, shows, and awards. Furthermore, they’ve teamed up with fantasy and sports gaming operator Underdog to bring sports prediction markets to 16 states, specifically targeting areas where traditional legal sports betting has not yet been adopted. This strategy highlights the companies’ efforts to navigate the fragmented regulatory landscape by operating where state prohibitions on sports betting are less clear-cut for prediction markets. It’s a clear indication of how diverse the prediction market landscape is becoming, extending even to areas like crypto gambling, where decentralized platforms facilitate predictions using blockchain technology for transparent and trustless transactions.
The Unresolved Federal vs. State Debate
The core of this conflict remains the fundamental disagreement over whether sports-related prediction market contracts should be categorized as federally regulated derivatives or state-level gambling. The CFTC, as the primary regulator of event contracts, has been examining this issue closely, with ongoing debates about its Regulation 40.11, which prohibits event contracts involving “gaming.” Some within the CFTC have expressed support for a “pro-innovation” stance, critiquing past interpretations as an “inappropriate constraint.” However, the legal landscape is complex, with federal court rulings sometimes reinforcing the idea that “gaming involves games,” potentially limiting event contracts tied to sports.
The outcome of these numerous state-level lawsuits and appeals will undoubtedly set precedents for the future of prediction markets in the US. The question of whether federal supervision truly overrides local gambling laws is being tested in courts from coast to coast. This intricate dance between state and federal authority, particularly concerning novel financial products, represents a significant moment for the future of online trading and wagering.
Looking Ahead: An Evolving Market
The prediction market industry is clearly in a period of rapid evolution and significant challenge. The ability of these platforms to aggregate collective wisdom for accurate forecasting across diverse events makes them powerful tools for information discovery. As technology continues to advance, particularly with the rise of blockchain-based markets that offer enhanced transparency and automation through smart contracts, their potential applications are only growing.
While the legal battles with state gaming regulators are far from over, the increasing interest from major financial players and the substantial trading volumes suggest that prediction markets are here to stay. Their journey will continue to be shaped by ongoing legislative and judicial scrutiny, seeking to find a balance between innovation, consumer protection, and established state regulatory frameworks. How this delicate balance is ultimately achieved will determine the accessibility and scope of these fascinating markets for years to come.
Related Pages
- Kalshi Hit With Nationwide Class Action Over ‘Illegal Sports Betting’
- Class action suit vs Kalshi raises the temperature in heated prediction market rift
- Polymarket Receives CFTC Approval to Resume US Operations After Years Offshore
- Prediction Market Legislation: How States Are Responding to a Growing Regulatory Gap
