US courts will decide whether prediction markets are federal derivatives or gambling.
US courts and regulators will determine in the coming months whether platforms like Kalshi and Polymarket will be regulated as federal derivatives markets or as state gambling entities. The decision, expected within 6 to 12 months according to an analysis by Raymond James, will define the regulatory regime applicable to this growing sector in the United States.
The central point of contention lies in the classification of event contracts such as "Team A will win." The question is whether these contracts should be considered federal swaps under the Commodity Exchange Act, overseen by the Commodity Futures Trading Commission (CFTC), or whether they are equivalent to sports betting, which requires licensing in each state.
Prediction platforms argue that when a contract is registered as a swap in a market regulated by the CFTC, federal jurisdiction should prevail over state laws. State authorities, in turn, argue that the US Congress never intended to federalize sports betting.
The conflict intensified after a 2024 court decision that invalidated the CFTC's attempt to block Kalshi's congressional control contracts. This verdict encouraged traders to invoke federal preemption, contributing to disputes between states and the federal government.
States such as Nevada, New Jersey, Maryland, and Massachusetts have issued cease and desist orders and initiated lawsuits against operators in this market. Ohio, New York, and California are also involved in legal actions related to the issue. Nevada's recent decision against broad federal preemption has become a benchmark for other states.
Appeals courts in the Third, Fourth, and Ninth Circuits are expected to issue the first comprehensive interpretations on swap classification and federal preemption during the next year. If there is disagreement among the decisions of the different circuits, the issue could reach the Supreme Court between 2027 and 2028.
The sector has attracted major players from the financial market. Companies such as Robinhood, CME Group, ICE, Cboe, and Coinbase are investing in building regulated infrastructure for event-based trading.
Prediction platforms are facing a period of legal uncertainty. The resolution of this issue will determine whether the market operates under a unified federal regime or under various state gambling regulations.
