Legal Insights
Prediction markets are platforms where individuals can place bets on the outcome of future events through buying and selling shares in the possible outcomes. These prediction markets sit at the intersection of federal derivatives law and state gambling laws, and the answer to whether they are lawful in the United States turns on preemption, venue, and product design. Federally, prediction markets are regulated by the Commodity Futures Trading Commission (CFTC). The legal landscape of prediction markets is fluid: federal courts have recently recognized strong preemption arguments favoring CFTC-regulated platforms, while other courts have sided with state gaming regulators.[1]
Introduction to Prediction Markets
Prediction markets enable traders to buy or sell event contracts that pay a fixed sum if a specified outcome occurs. The Commodity Exchange Act (CEA) places such contracts under the CFTC’s jurisdiction when they are offered on a designated contract market (DCM) or swap execution facility, and Commission Regulation 40.11 empowers the agency to bar event contracts that involve or relate to “gaming” or otherwise contravene the public interest.[2] The CFTC has enforced this framework, ordering Polymarket, a prediction market platform, in 2022 to pay a civil penalty and wind down non‑compliant markets for offering off‑exchange event‑based binary options, while emphasizing that “[a]ll derivatives markets must operate within the bounds of the law. . .”[3]
At the same time, the federal regime has evolved to include multiple CFTC‑designated exchanges focused on event contracts, including Kalshi (designated in 2020) and, more recently, Polymarket US and Aristotle Exchange, signaling a path for compliant listing of event markets. Courts have also curtailed prior attempts to broadly block election contracts. In 2024, the U.S. District Court for the District of Columbia held that Kalshi’s congressional-control contracts were not “gaming” within the meaning of Regulation 40.11.[4] Specifically, the Court held that “’gaming,’ as used in the special rule, refers to playing games or playing games for stakes.”[5]
Current Prediction Market Litigation
The most consequential recent decision arrived on April 6, 2026, when the United States Court of Appeals for the Third Circuit affirmed a preliminary injunction for Kalshi against New Jersey, holding that Kalshi showed a reasonable chance of success in arguing that the CEA preempts state gambling law as applied to CFTC‑regulated event contracts.[6] The Court emphasized the CFTC’s exclusive jurisdiction over DCM‑listed event contracts and the absence of any Commission action prohibiting Kalshi’s sports‑related listings, while acknowledging savings clauses that preserve space for certain non‑conflicting state regulation.[7] A dissent argued vigorously for a presumption against preemption in an area traditionally policed by states and pointed to the Commission’s gaming‑related rule text, underscoring the live controversy.[8]
Outcomes elsewhere are mixed, as state regulators have prevailed against Kalshi at the preliminary‑injunction stage in Nevada, Maryland, and Ohio, while Kalshi secured relief in Tennessee, yielding intra‑ and inter‑circuit splits now on appeal.[9] The CFTC ramped up the federal-state clash by suing Arizona, Connecticut, and Illinois in April 2026 to stop what it has characterized as unlawful state interference with federally regulated event markets, reflecting a more assertive federal posture on preemption.[10]
Additionally, CFTC enforcement is an important consideration as prediction markets develop. The CFTC’s 2022 Polymarket order remains a touchstone for platforms that list event markets without appropriate registration, even as Polymarket US has since obtained DCM status to operate within the CEA framework.
Federal Regulatory Developments
The CFTC has previewed further policymaking on prediction markets, including an advance notice of proposed rulemaking (ANPR) in March 2026 to solicit comment on the scope and public‑interest implications of “gaming” and “sports competition” in event‑contract listings, as noted by the Third Circuit.[11] Meanwhile, the agency’s DCM roster reflects a notable expansion of exchanges positioned to list compliant event contracts. These moves, combined with recent court decisions, suggest a regulatory path for event markets under the CEA, even as preemption battles with states continue.
Open Questions and What to Watch
There are two main questions left open as to the legal and regulatory frameworks governing prediction markets. The first question remains that of legal preemption. The Third Circuit’s embrace of CEA preemption over state gambling laws in the Kalshi and New Jersey dispute directly conflicts with outcomes in several district courts and may ultimately lead to Supreme Court review. The second main question surrounds the scope of Regulation 40.11. Courts have now questioned the interpretations of “gaming,” but the Commission’s ANPR leaves room for new rule text or guidance that could narrow or expand the permissible universe of event contracts.
Conclusion
The U.S. prediction‑market landscape is neither unregulated gambling nor unfettered finance. It is a developing market which the CFTC, states, and federal courts are all currently navigating. New developments will undoubtedly unfold, and interested parties should pay close attention to appellate developments, the CFTC’s event‑contract rulemaking process, and state regulatory changes.
[1] Jenna Greene, Betting on the verdict: Kalshi case could shape prediction markets, Reuters, https://www.reuters.com/legal/litigation/betting-verdict-kalshi-case-could-shape-prediction-markets-2026-04-06/#:~:text=As%20legal%20challenges%20mount%20against%20prediction%20market%20operators%2C%20traders%20have%20responded%20fittingly%3A%20by%20betting%20on%20whether%20Kalshi%20will%20win%20a%20major%20pending%20case.
[2] See 7 U.S.C. § 7 a-2 (c); 17 C.F.R. 40.11.
[3] C.F.T.C. Release No. 8478-22, CFTC Orders Event-Based Binary Options Markets Operator to Pay $1.4 Million Penalty, https://www.cftc.gov/PressRoom/PressReleases/847822#:~:text=%E2%80%9CAll%20derivatives%20markets%20must%20operate%20within%20the%20bounds%20of%20the%20law%20regardless%20of%20the%20technology%20used%2C%20and%20particularly%20including%20those%20in%20the%20so%2Dcalled%20decentralized%20finance%20or%20%E2%80%98DeFi%E2%80%99%20space%2C%E2%80%9D%20said%20Acting%20Director%20of%20Enforcement%20Vincent%20McGonagle.
[4] See KalshiEX LLC v. CFTC, Civil Action No. 23-3257 (JMC), 2024 LX 46673 (D.D.C. Sep. 12, 2024);
[5] KalshiEX LLC v. CFTC, Civil Action No. 23-3257 (JMC), 2024 U.S. Dist. LEXIS 163925, at *27 (D.D.C. Sep. 12, 2024).
[6] See Kalshiex, LLC v. Flaherty, No. 25-1922, 2026 U.S. App. LEXIS 9948, at *6 (3d Cir. Apr. 6, 2026).
[7] Id. at *9-11.
[8] Id. at *28.
[9] Jenna Greene, Betting on the verdict: Kalshi case could shape prediction markets, Reuters, https://www.reuters.com/legal/litigation/betting-verdict-kalshi-case-could-shape-prediction-markets-2026-04-06/#:~:text=As%20legal%20challenges%20mount%20against%20prediction%20market%20operators%2C%20traders%20have%20responded%20fittingly%3A%20by%20betting%20on%20whether%20Kalshi%20will%20win%20a%20major%20pending%20case.
[10] Id.
[11] C.F.T.C. Release No. 9194-26, CFTC Seeks Public Comment on Advances Notice of Proposed Rulemaking Relating to Prediction Markets,
https://www.cftc.gov/PressRoom/PressReleases/9194-26.
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