The $40 Billion Prediction-Market Fight Hits Washington

Prediction markets have become one of the fastest-growing corners of American finance, with platforms handling more than $40 billion in event contracts last year. Now Washington is trying to decide what they actually are: financial markets, gambling products, or something in between.

The Commodity Futures Trading Commission is preparing a new framework that appears likely to preserve many sports-related contracts, while giving regulators more power to block markets that are easy to manipulate or against the public interest. That matters for platforms like Kalshi and Polymarket — and for the broader question of where financial trading ends and gambling begins.

An event contract is a yes-or-no trade tied to a future outcome. If the event happens, one side pays out. If it does not, the other side does. Simple in concept. Complicated in law.

Trading or gambling? The question driving everything

That one question explains the entire regulatory fight.

Platforms like Kalshi insist their products are federally regulated financial derivatives under the Commodity Exchange Act — not gambling, and therefore beyond the reach of state betting laws. Several states have sent cease-and-desist orders, pursued enforcement actions, or fought the platforms in court. New Jersey, Illinois, and Minnesota have been among the most aggressive. Minnesota became the first state to outright ban prediction markets when its governor signed legislation last month.

The most important court ruling so far came in April, when the Third Circuit upheld an injunction barring New Jersey from enforcing its gambling laws against Kalshi's sports contracts. That decision supports the federal-derivatives framing. It also deepened a split with other court outcomes, and may ultimately reach the Supreme Court.

The CFTC has gone further than just watching. It has filed suits against multiple states seeking declarations that it holds exclusive federal jurisdiction over event contracts. Chairman Selig has been direct: the CFTC is "planting the flag as the preeminent and exclusive regulator of prediction markets."

Why sports contracts are the flashpoint

Sports-related event contracts are where the fight is most concentrated.

As of February 2026, roughly 87% of Kalshi's $39.7 billion in trading over the past year was on sports. When Kalshi and competitors began offering sports contracts in early 2025, states that had built regulated sports-betting industries — New Jersey chief among them — saw a direct threat to their licensing frameworks and tax revenues.

The federal-versus-state tension is partly legal and partly economic. States fought hard to legalize sports betting after the Supreme Court cleared the way in 2018 and built regulatory infrastructure around it. Having federally supervised platforms now offer competitive products without state licensing is, from a state-regulator perspective, an end-run around that entire framework.

How Washington changed its mind

First: In February 2026, the CFTC withdrew a 2024 proposed rule that would have banned event contracts on sports and politics entirely. Chairman Selig called the prior approach inadequate.

Second: In March 2026, the CFTC issued a staff advisory requiring exchanges to ensure contracts are not "readily susceptible to manipulation" and mandating real-time monitoring.

Third: The CFTC published an advance notice of proposed rulemaking requesting public comment. The formal framework is now under White House review at the Office of Management and Budget ahead of an expected release.

Why manipulation is the real risk

The CFTC's manipulation concern is not hypothetical.

Sports betting has already produced scandals in which players coordinated with gamblers to underperform. A thinly traded event contract on a single game outcome can be even easier to rig — and the financial incentive to do so grows as volumes rise. The CFTC has already brought enforcement action against two individuals for insider trading on prediction markets and issued a specific advisory on its authority in that area.

The proposed framework pushes exchanges to coordinate with sports leagues and integrity monitors, and to avoid listing contracts where a single participant could meaningfully move the outcome.

Who wants tighter limits

Not everyone wants the markets to grow.

A group of congressional Democrats wrote to the CFTC urging tighter limits on insider trading and certain contract types, warning of a "rapid erosion of integrity" across elections, sports, war, and government-action contracts. New York's attorney general separately warned consumers that prediction markets lack the safeguards of regulated gambling platforms.

There is also a political dimension. Critics have questioned whether industry ties to the Trump orbit are shaping the agency's friendlier stance. That allegation is explosive, but the more immediate fight is still legal: who gets to regulate these products?

The bottom line

The CFTC is trying to bring prediction markets inside the federal financial system. States are trying to keep them inside the gambling regulatory box. The courts will decide which label sticks.

If the CFTC wins that fight — in the courts and in the rulemaking — prediction markets will likely expand rapidly under federal oversight. If the states win, the industry fragments across 50 different regulatory regimes, and the growth story gets much harder to run.

The $40 billion that moved through these platforms last year was built on legal uncertainty. The rulebook arriving now will determine whether the next $40 billion comes from millions of new users or from years of litigation.

Sources

• US agency proposes new rules to govern prediction markets (Reuters): https://www.reuters.com/world/cftc-proposes-new-rules-govern-prediction-markets-wsj-reports-2026-06-10/
• CFTC withdraws event contracts rule proposal (CFTC press release): https://www.cftc.gov/PressRoom/PressReleases/9179-26
• CFTC sues states to reaffirm exclusive jurisdiction over prediction markets (CFTC press release): https://www.cftc.gov/PressRoom/PressReleases/9206-26
• CFTC enforcement division issues prediction markets advisory (CFTC press release): https://www.cftc.gov/PressRoom/PressReleases/9185-26
• New Jersey cannot regulate Kalshi's prediction market, appeals court rules (Reuters): https://www.reuters.com/world/new-jersey-cannot-regulate-kalshis-prediction-market-us-appeals-court-rules-2026-04-06/
• NY attorney general warns of prediction market harms (NY AG press release): https://ag.ny.gov/press-release/2026/consumer-alert-and-industry-alert-attorney-general-james-warns-new-yorkers
• Prediction markets: policy issues for Congress (Congressional Research Service): https://www.congress.gov/crs-product/IF13187
• Prediction markets at a crossroads (Norton Rose Fulbright): https://www.nortonrosefulbright.com/en-us/knowledge/publications/ad8a494a/prediction-markets-at-a-crossroads-preemption-enforcement-and-rulemaking