The boundary between regulated financial instruments and outright gambling is rapidly eroding. Companies such as Kalshi and Crypto.com now offer so-called “prediction markets” that mirror traditional sports betting, igniting a regulatory crisis. State gaming regulators have issued cease-and-desist orders, while these firms have responded with litigation—highlighting an urgent need for jurisdictional clarity.
Historically, sports and horse race betting have fallen exclusively under the purview of state-licensed gaming entities. In contrast, the Commodity Futures Trading Commission (CFTC) has overseen futures and options in commodities and financial markets. These regulatory domains have long remained separate.
That separation is now collapsing. CFTC-approved exchanges are offering contracts on the outcomes of sporting events, effectively bringing gambling to all 50 states under the guise of financial instruments. This shift is the result of several converging trends: evolving political attitudes, legal ambiguity over what constitutes gambling versus investment, and the exploitation of CFTC rules originally intended for financial derivatives. The result is a loosely defined category now widely referred to as “prediction markets.”
The term “prediction market” itself lacks a clear legal definition and is not grounded in established statutory or judicial authority. Historically, the CFTC has rejected contracts it deems to constitute gaming or to be contrary to public interest. However, Kalshi’s recent court victory allowing contracts on U.S. elections has emboldened the firm—and others—to venture into sports betting, offering their products through retail financial platforms like Robinhood.
This encroachment into state gaming territory has triggered a swift legal and regulatory response. Attorneys general from 34 states, along with several Indian tribes and organizations, have joined forces to oppose Kalshi’s offering of sports event contracts in their jurisdictions. They are now quickly educating themselves on prediction markets to assert their regulatory jurisdiction in court and in the marketplace.
In evaluating prediction markets, the legal classification of each contract should be based on its core purpose. Contracts based on sporting events are speculative entertainment and should be regulated as gambling at the state level. Conversely, contracts tied to economic indicators or legitimate hedging activities may fall within the CFTC’s jurisdiction.
To mount an effective defense of state authority, regulators must coordinate legal strategies and emphasize the following concerns:
- The CFTC’s minimum betting age is 18, while in most states it is 21;
- Violation of the federal Wire Act;
- Tribal sovereignty under the Indian Gaming Regulatory Act (IGRA) is threatened;
- The CFTC lacks expertise in gambling regulation and enforcement;
- The CFTC is straying from its core mandate of regulating financial markets.
Kalshi’s recent pivot to sports betting underscores the failure of its original model. Earlier contracts—such as whether the Consumer Price Index would rise, or what Taylor Swift’s next hit might be—failed to attract meaningful liquidity or user engagement. Kalshi was unable to compete with established financial exchanges like the Chicago Board of Trade. In 2024, the company sought relevance by offering contracts on the U.S. presidential election, eventually winning a legal battle against the CFTC. But trading volume dropped sharply once the election ended. Kalshi then shifted to sports betting—a move that now comprises 80 percent of its volume and has triggered a new wave of legal battles with state authorities.
A major issue is regulatory mismatch. Most state regulators are unfamiliar with CFTC processes, while CFTC staff are largely unaware of state gambling laws. Now that the CFTC is effectively authorizing forms of gambling, this regulatory knowledge gap must be urgently addressed. Legal arguments should stress that platforms like Kalshi—often in coordination with professional traders—are functioning as bookmakers, accepting bets across state lines and potentially violating federal law. This regulatory disparity is especially troubling given the consumer protections imposed by state gaming agencies, which include prohibitions on credit-based wagering and ATM access near casino floors. In contrast, Kalshi is allowed to operate through Robinhood—an investment app that also manages user retirement accounts—potentially exposing unwitting users to unregulated gambling risk.
Prediction markets are not a universal solution. When properly structured, they may offer useful insights. But without adequate safeguards, they risk encouraging addiction, distorting market signals, and misleading the public. For prediction markets to serve a valid forecasting purpose, they must:
- Attract a large, diverse, and unbiased participant pool;
- Be protected from manipulation and conflicts of interest;
- Be grounded in publicly verifiable data;
- Be insulated from large speculative bets that can distort pricing.
Lacking these safeguards, prediction markets become speculative ventures, not sources of truth.
Consider the absurdity of a market predicting the outcome of the Papal election—a process conducted in strict secrecy, with no public data and no way to verify outcomes. Or the ethical concern raised when a California gubernatorial candidate placed a bet on his own race. Even if the wager was small and disclosed, it undermines public trust. In another recent example, a prediction market failed to forecast the winner of a high-profile New York Democratic primary, casting doubt on the reliability of these markets even in well-observed elections.
The current hype surrounding prediction markets overstates their utility and masks their risks. These markets are being sold as revolutionary tools for forecasting and public problem-solving, yet many of the sectors they are entering—such as sports and elections—derive no legitimate economic benefit from speculative trading.
To move forward, regulators should develop a classification system:
- Markets suitable for federal oversight (e.g., macroeconomic indicators);
- Markets that should be classified as gambling and fall under state jurisdiction;
- Markets that are inappropriate altogether and should be banned.
Achieving clarity will require unprecedented collaboration among federal, state, and tribal regulatory systems. Given how rare such cooperation is, litigation may ultimately decide the boundaries—leaving consumers, regulators, and markets in a prolonged state of uncertainty.
