Is it a bet or a trade?

A series of lawsuits has exposed a fundamental disagreement over the scope of the Commodity Exchange Act, a federal law regulating futures contracts and options. The 1930s law was expanded to establish the Commodity Futures Trading Commission, which serves as the federal watchdog policing trading practices, ensuring financial integrity, and preventing market manipulation.

The CFTC has filed legal challenges against seven states — Arizona, Connecticut, Illinois, Wisconsin, Minnesota, New York, and Rhode Island — opposing their cease-and-desist orders, lawsuits, criminal charges, and, in one case, legislation seeking to ban prediction markets. The agency has also intervened in related cases in Ohio, Massachusetts, and Nevada, though it has not sued those states directly.

CFTC Chairman Michael Selig has continuously argued that prediction markets, which are online platforms that allow users to “gamble” on real-life events, fall under federal regulatory jurisdiction. 

“States cannot circumvent the clear directive of Congress,” he said in an April statement announcing a lawsuit against Wisconsin. “Our message to Wisconsin is the same as to New York, Arizona, and others: if you interfere with the operation of federal law in regulating financial markets, we will sue you.”

At the same time, the states argue that prediction markets are functionally illegal gambling. 

“The Trump Administration is recycling industry arguments that have been rejected in district courts across the country,” Connecticut Attorney General William Tong (D) said in a statement to the Washington Examiner. “These contracts are plainly unlicensed illegal gambling under time-worn state law, and we will aggressively defend Connecticut’s commonsense consumer protection laws.”

The Republican governor of Utah, where there is a statewide gambling ban, strongly opposed prediction markets earlier this year, saying they are “gambling — pure and simple.” 

“Let me be clear, I will use every resource within my disposal as governor of the sovereign state of Utah, and under the Constitution of the United States to beat [the CFTC] in court,” Gov. Spencer Cox (R-UT) said in February.

The CFTC has not taken legal action against Utah, though there is ongoing litigation between the state and prediction market platform Kalshi. 

In April, a bipartisan coalition of 41 state attorneys general wrote to the CFTC to argue the agency “lacks exclusive jurisdiction over a broad range of sports-related contracts currently offered as event contracts.”

“This is gambling, no matter how they try to dress it up — and that means it belongs under state jurisdiction,” said Ohio Attorney General Dave Yost, a Republican. “States have a longstanding right and responsibility to protect their citizens from the dangers of gambling, whether it’s on a prediction market or a casino floor.”

President Donald Trump has also placed his finger on the scale, recently throwing his support behind the CFTC. 

“It is critically important that the CFTC’s exclusive authority over Prediction Markets is maintained, and that they will thrive,” Trump posted on Truth Social last month. “Under my leadership, we are setting ‘rules of the road’ that are the Gold Standard for the States.”

Legal experts weigh in 

At the center of the growing legal fight over prediction markets is not just a dispute over gambling but a deeper clash over what Congress actually authorized when it expanded federal derivatives law through the Dodd-Frank Act.

“The battle is over what Congress intended through Dodd-Frank,” Daniel Wallach, a gaming law attorney who follows the cases closely, told the Washington Examiner. “It ultimately boils down to a question of congressional intent.”

The dispute centers on whether prediction market contracts tied to sporting events fall under the Commodity Futures Trading Commission’s authority over financial products known as swaps. Companies such as Kalshi argue federal law gives the CFTC exclusive authority to regulate those contracts. States argue Congress never clearly intended to strip them of their power to regulate gambling.

“The strongest argument the states have is that this is a sports gambling case — not an attack on derivatives markets as a whole,” Wallach said. “Historically, Congress has disfavored sports gambling and only addresses it in clear and explicit terms.”

Because gambling has traditionally been regulated by states, courts generally require a clear statement from Congress before federal law overrides state authority.

“States are arguing that gambling is traditionally within the province of state police powers, so courts require a heightened standard for federal preemption,” Wallach said.

Prediction market companies, meanwhile, argue the answer is already in federal law. “Kalshi’s argument is: ‘Look at the text,’” Wallach said. “The definition of ‘swap’ is broad enough to include event contracts with financial consequences.”

Wallach said the outcome could have implications far beyond prediction markets. “This is a legal controversy that involves 50 states, the federal government, tribes, and major financial institutions,” he said.

Why courts are struggling with the issue

For now, the future of prediction markets is likely to be decided in the courts. Both Wallach and Jeff Le Riche, an attorney who worked at the CFTC for two decades, said Congress could resolve the dispute by either expressly authorizing sports event contracts or banning them outright. But neither expects lawmakers to act anytime soon.

“I think it does, unless Congress takes decisive action,” Wallach said when asked whether the issue is ultimately headed to the Supreme Court. “Congress can authorize them, Congress can prohibit them. But absent that, the courts are going to decide.”

Le Riche was similarly skeptical that Congress would step in.

“In maybe a different time, Congress would have a solution, but I don’t see that happening now,” he said.

Instead, both pointed to the federal appeals courts as the next major battleground. At the moment, only one federal appeals court has weighed in on the issue. But several additional rulings are expected in the coming months, potentially creating conflicting interpretations of federal law that lead to the Supreme Court taking up the issue.

Wallach said the nationwide nature of prediction markets makes Supreme Court review particularly likely if federal courts begin reaching different conclusions.

“These exchanges operate across 50 states,” he said. “You can’t really have a situation where in some states it’s allowed, in other states it’s not allowed.”

He also pointed to the broad coalition of interests involved in the litigation, including state governments, Native American tribes, federal regulators, and major financial institutions.

For Wallach, the question is not if the Supreme Court will eventually weigh in, but when.

“The question is when,” he said. “By the end of the calendar year, we will likely have decisions from the 9th Circuit, the 4th Circuit, and the 6th Circuit.”

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If those rulings begin to diverge, Wallach believes the issue could arrive before the high court relatively quickly.

“My sense is that this lands at the Supreme Court for oral argument in the latter half of 2027, with a decision coming down by the midpoint of 2028,” he said.