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Legal Fronts In Operating Sports Prediction Markets
The recent boom in prediction markets has threatened to disrupt the multi-billion-dollar sports wagering industry, with prediction market operators claiming the ability to offer their platforms nationwide without the legal obstacles that bog down online gaming and gambling. In March 2025, for example, prediction market operators saw hundreds of millions of dollars in trading volume for sports-related event contracts. State gambling regulators have begun asserting jurisdiction over these platforms, arguing that event contracts are really “pools,” “bets,” or “wagers” on sporting events, all of which require a sports wagering license issued by a state gaming regulator.
At least six states — Illinois, Maryland, Montana, Nevada, New Jersey, and Ohio — have issued cease-and-desist letters directing prediction markets to stop offering their services, and other state regulators are reportedly investigating prediction markets, too.
On its website, prediction market operator KalshiEX defines a “prediction market” as “a trading platform where participants buy and sell contracts based on the projected outcomes of specific events. Participants can wager on diverse topics such as economics, pop culture, politics, technology and even the weather.”
Kalshi recently filed suit against gaming officials in Nevada and New Jersey, alleging that the federal Commodity Exchange Act (CEA), which governs derivatives markets, preempts the two states’ sports wagering laws with respect to sports-related event contracts. KalshiEX LLC v. Hendrick, 2:25-cv-00575 (D.Nev.); KalshiEX LLC v. Flaherty LLC, 25-cv-2152 (D.N.J.).
Kalshi’s lawsuits present what could be a critical question for the future of sports wagering in America. While prediction markets and sportsbooks can coexist — for now the range of sports-related event contracts is somewhat limited compared to the options available at a sportsbook — prediction markets that could significantly and permanently disrupt an already competitive sports wagering market.
Some sports wagering operators are reportedly bracing for that possibility and are considering whether they should break into prediction markets themselves. But Congress apparently did not want derivatives to be used as a vehicle for sports wagering, and it remains to be seen whether prediction markets operators can overcome that hurdle.
Sports prediction markets are the latest form of event contracts to test the CEA and Commodity Futures Trading Commission (CFTC), the primary regulator of derivatives markets. In 1993, the CFTC permitted the Iowa Electronic Markets (IEM), a prediction market created by the University of Iowa, to list political event contracts based on election outcomes, though the CFTC limited the IEM’s election contracts to only academic use (to determine whether markets can aggregate information and predict outcomes more accurately than public polling) and required that the IEM operate on a nonprofit basis.
The Hollywood Stock Exchange (HSX) subsequently launched a popular prediction market for movie box-office receipts but using “Hollywood Dollar” play money. When the HSX proposed to become a for-profit, CFTC-regulated exchange, the Motion Picture Association of America (MPAA) and Congress pushed back. The MPAA successfully lobbied Congress to amend the CEA to effectively prohibit prediction markets and event contracts based on movie box-office receipts.
Nevertheless, interest in prediction markets for sports and other events has persisted despite uncertainty as to whether certain event contracts may involve “gaming” or otherwise be contrary to the public interest under the CEA.
An event contract is a kind of derivative contract that can be used to mitigate economic risk — the payoff for an event contract is based on “a specified event, occurrence, or value,” KalshiEX v. CFTC, 119 F.4th 58 (D.C. Cir. 2024). The typical event contract involves a binary, yes-or-no question involving real-world events — for example, whether a stock market index will close above a certain level at year-end. A person can trade on a “yes” or a “no” position, and whichever position is correct will be paid out. The contract identifies each outcome, the payments associated with each outcome and an expiration date for the contract. Event contracts are swaps.
Retail investors can only trade swaps on federally regulated exchanges known as “designated contract markets” (DCMs). The CFTC is responsible for designating and overseeing DCMs. DCMs are required to comply with the CEA’s “core principles,” which include, among other things, prevention of market manipulation and price distortion, 7 U.S.C. §7(d)(4).
A DCM may offer an event contract by self-certifying that the contract complies with the requirements of the CEA, 7 U.S.C. §§7a-2(c)(1), (c)(5)(B).
But the CFTC has the power to review and prohibit certain “agreements, contracts, or transactions” that are “contrary to the public interest,” including ones that involve “activity that is unlawful under any Federal or State law,” “gaming” and any “other similar activity determined by the Commission … to be contrary to the public interest,” 7 U.S.C. §7a-2(c)(5)(C)(i). By law, no contract “determined by the Commission to be contrary to the public interest,” including contracts determined to be “gaming” contracts, “may be listed or made available for clearing or trading” on a DCM, 7 U.S.C. §7a-2(c)(5)(C)(ii).
The U.S. Court of Appeals for the D.C. Circuit is currently deciding in KalshiEx v. CFTC, 24-5205, whether election-related event contracts involve “activity that is unlawful” or “gaming” such that the CFTC could bar the trading of these contracts as “contrary to the public interest.” The CFTC says election-related event contracts are “gaming” because such contracts are effectively “wagering on a contest of others,” which would make the contracts “gambling” prohibited by state law. Kalshi, on the other hand, says “gaming” means just that — “playing games or playing games for stakes,” not “gambling.”
Contrast the federal regulatory scheme for “event contracts" with state regulation of sports wagers. Each state has its own definition of what constitutes a “bet” or “wager,” but the commonly recognized definition is the risking of money for the chance to win money, contingent on the outcome of an uncertain event. An operator may not accept any type of wager, sports or otherwise, unless expressly authorized and licensed to do so under state law. And all licensed operators must abide by the requirements of state and federal gaming and gambling law. That includes not just state regulatory requirements — such as geo-fencing, know-your-customer obligations and responsible gaming compliance — but also federal laws that prohibit interstate gambling activity, such as the Wire Act, which prohibits the interstate transmission of sports bets and wagers (even ones authorized by state law), 18 U.S.C.1084, and the Unlawful Internet Gambling Enforcement Act (UIGEA), 31 U.S.C. §5361.
Beginning in late December 2024, operators started offering sports-related event contracts. The Biden CFTC attempted to halt the trading of such contracts at least in one instance, but the change in presidential administration also brought a change to the CFTC’s tune. Acting CFTC Chair Caroline Pham remarked that “[p]rediction markets are an important new frontier in harnessing the power of markets to assess sentiment to determine probabilities,” and announced a roundtable through which the commission could consider “regulation and oversight of prediction markets, including sports-related event contracts.” Notably, since the change in federal administration, the CFTC has made no public effort to stop prediction market operators from offering sports-related event contracts.
State regulators, however, have stepped up their scrutiny over such contracts. Kalshi has received at least six cease-and-desist letters from state gaming regulators (i.e., Illinois, Maryland, Montana, Nevada, New Jersey and Ohio), Robinhood has received at least four (Illinois, Maryland, New Jersey and Ohio), and Crypto.com has received at least three (Illinois, Maryland and Ohio). Robinhood appears to have responded to one of these cease-and-desist letters by shuttering its prediction market offerings in New Jersey.
In addition, Massachusetts Secretary of State Bill Galvin issued a subpoena to Robinhood over its prediction marketplace, while the Connecticut Department of Consumer Protection announced an investigation into Kalshi. The Washington State Gambling Commission is reportedly investigating “prediction markets as a whole” and the Kansas Racing and Gaming Commission is similarly “monitoring” developments in the space.
Kalshi’s lawsuits against gaming officials in Nevada and New Jersey both allege the same claim: by “threatening to enforce” state laws governing sports wagering, Nevada and New Jersey are “impermissibly intruding on the CFTC’s exclusive authority to regulate futures trading on CFTC-regulated exchanges.” According to Kalshi, “[u]nless and until the CFTC takes action on Kalshi’s sports-related contracts, they remain authorized under federal law.”
Kalshi's claims may face legal headwinds, in no small part due to arguments it made in defending its ability to offer election-related event contracts. To quote Kalshi’s D.C. Circuit brief: “Congress did not want sports betting to be conducted on derivatives markets.” DCMs, Kalshi said, are intended to “allow ‘hedging’ of economic risk,” but “contracts relating to games — again, activities conducted for diversion or amusement — are unlikely to serve any ‘commercial or hedging interest.’” Kalshi has argued that, by prohibiting event contracts relating to “gaming,” Congress was “concerned with casino gambling and sports, not the premise of the entire derivatives market.”
For its part, the CFTC appears to recognize the difficulties associated with treating sports-related event contracts as instruments regulated by the CEA. In a roundtable announcement, some of the “key obstacles” to “the regulation and oversight of prediction markets” identified by the CFTC included “CFTC-registered entities’ legal arguments in court that event contracts based on games or sports contests or sporting events constitute ‘gaming,’ and are therefore prohibited under the Commodity Exchange Act,” along with “state regulatory schemes” and “other federal laws applicable to sports betting.”
But even if sports-related event contracts involve “gaming,” it is far from settled whether a sports-related event contract is necessarily subject to state regulation. After all, Congress tasked the CFTC with “determining” whether a contract is “contrary to the public interest,” 7 U.S.C. §7a-2(c)(5)(C)(i), (ii). A court could very well conclude that it is up to the CFTC and the CFTC alone to police sports-related event contracts — even if such contracts might otherwise constitute sports wagering.
In fact, that is exactly the conclusion that Kalshi hopes the Nevada and New Jersey courts will reach: that the CEA preempts the field on all event contracts (including sports-related event contracts) — or that, at a minimum, enforcement of state gambling laws would frustrate CFTC oversight of event contracts. The pivotal question is whether the CFTC’s circumscribed role in determining event contracts to be prohibited “gaming” contracts necessarily means that state gaming regulators have no role to play. And that question must be considered in light of the extensive latticework of federal gaming laws, such as the Wire Act, UIGEA, and the Indian Gaming Regulatory Act that accord respect to state (and tribal) regulation of gaming and gambling.
If Kalshi is right and the CEA preempts state wagering laws as they relate to sports-wagering contracts, such an outcome could have dramatic consequences for the sports wagering industry. It would have the potential to cause not just a realignment and reconfiguration of sports wagering (or event contracting) as we know it, it would also lead to a regulatory void. The CFTC cannot meaningfully regulate sports-related event contracts using the up-or-down power of prohibition. It lacks both statutory authority and experience to address the range of compliance issues uniquely presented by staking money on the outcome of sporting events, regardless of whether that happens as a “contract” or as a “wager.” These issues include integrity monitoring, responsible gaming and anti-money laundering, to name just a few. Any court addressing the preemptive power of the CEA will need to grapple with these practical concerns.
Until the issues raised by sports-related event contracts are finally settled in court or through legislation in Congress, Kalshi and other exchanges continue to list a variety of sports and other event contracts. While public interest in prediction markets grows, so do the legal obstacles to entrepreneurs and investors that wish to create exchanges or participate in sports-related event contracts. The only certain bet is that the legality of sports prediction markets will soon be tested.
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