Since 2024, prediction market platforms such as Kalshi and Polymarket have surged in popularity, drawing users, media partnerships, and scrutiny from both sides of the political spectrum.
Users can wager on real-world outcomes from politics to sports, blurring the line between financial instruments such as markets, which are federally regulated, and gambling, which is largely regulated by the states.
That overlap is at the heart of a growing legal fight: Are these markets federally regulated financial exchanges or gambling, which is regulated by state laws?
How is gambling regulated?
Most gambling regulations, such as sports betting, are handed on the state level, with a few exceptions.
In 2018, the Supreme Court paved the way for states to legalize and regulate sports betting. Since then, policies have varied widely, with some states permitting full online betting, while others, such as Utah, prohibit it altogether.
At the federal level, the Unlawful Internet Gambling Enforcement Act bars gambling businesses from knowingly accepting payments tied to illegal online bets, while the Federal Wire Act governs interstate sports betting.
The Indian Gaming Regulatory Act establishes a federal framework for overseeing gambling operations on tribal lands.
What’s the controversy?
Many states have moved to crack down on prediction market platforms, issuing cease-and-desist orders and claiming they constitute illegal online gambling under state law. Arizona filed criminal charges against the prediction market platform Kalshi this year.
Gov. Spencer Cox (R-UT) has argued that prediction markets are gambling and, in a February statement on X, promised to take legal action against them in his state.
“We are putting a casino in the pocket of every single American, and they are targeting especially young people,” Cox said in March. “It is really awful what they are doing, and we are going to make sure this doesn’t happen in our state.”
Cox recently signed a bill banning wagers on specific players or events during sporting contests that are not directly connected to the outcome of a game, specifically targeted at prediction markets.
Other critics argue the platforms are exploiting weak federal oversight.
“This past year, emboldened by limp and overly permissive federal regulators like the Commodity Futures Trading Commission (CFTC), so-called ‘prediction markets’ have transformed themselves into illegal sportsbooks, offering their users illicit sports wagers,” wrote Sen. Catherine Cortez Masto (D-NV) wrote in a March statement.
“Prediction markets defy all of the commonsense and proven rules of the road that allow our gaming industry in Nevada and across the country to be socially responsible community partners,” the senator added.
At the same time, multiple lawmakers on Capitol Hill are drawing up legislation to rein in prediction markets.
Rep. Jamie Raskin (D-MD), a co-sponsor of the STOP Corrupt Bets Act, argued that prediction markets spread “civic cynicism and distrust in our democratic institutions.”
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The federal response
At the same time, federal regulators are pushing back on states’ attempts to regulate their markets. The CFTC moved to block Arizona from enforcing state gambling laws Wednesday.
“Arizona’s decision to weaponize preempted state criminal law against companies that comply with a comprehensive federal regime sets a dangerous precedent,” Chairman Michael S. Selig said. “The CFTC is committed to vigorously defending its exclusive authority over prediction markets.”
Last week, the CFTC also sued Arizona, Connecticut, and Illinois for their attempts to regulate prediction market companies.
How are prediction markets regulated?
The core of the dispute comes down to classification.
The CFTC argues that prediction markets offer “event contracts,” a type of derivative regulated under federal law. Prediction markets are regulated under federal law, not state gambling rules, because they are financial derivatives.
Under that system, outcomes are priced by market participants, not set by a bookmaker. Regulators say that distinction separates them from gambling, where a “house” sets odds and takes bets.
“State-regulated gambling includes traditional casino games, like roulette or blackjack, the lottery, and sports books,” a spokesperson for the CFTC said in a statement to the Washington Examiner. “State-regulated gambling involves a house that hosts the games, or sets betting lines and odds.”
The spokesperson added that the CFTC conducts its own surveillance through technology platforms, seasoned career staff, and “frequent conversations” with exchanges about trades that raise red flags.
