The battle over prediction markets in the United States is no longer just about whether platforms such as Kalshi and Polymarket should be allowed to operate.<\/p>\n\n\n\n
The bigger question is who actually has the authority to regulate them<\/strong>.<\/p>\n\n\n\n Federal regulators say prediction markets are financial derivatives that belong under the Commodity Futures Trading Commission. Several states argue that many of the same contracts, particularly those tied to sports, function like gambling and should therefore follow state gaming laws.<\/p>\n\n\n\n That disagreement has now turned into a nationwide legal fight.<\/p>\n\n\n\n On Aug. 11, the CFTC used emergency authority under the Commodity Exchange Act to order KalshiEX to continue operating after New York Attorney General Letitia James filed a lawsuit seeking to restrict the platform and claiming more than $36 billion in damages.<\/p>\n\n\n\n The CFTC has also taken legal action involving nine states as it tries to defend federal control over regulated prediction markets.<\/p>\n\n\n\n At the same time, separate disputes involving third-party data and trademarks are creating another layer of uncertainty.<\/p>\n\n\n\n The result is a regulatory framework being shaped less by Congress and more by courts around the country.<\/p>\n\n\n\n The latest confrontation began after New York sued Kalshi on July 31.<\/p>\n\n\n\n The state accused the prediction market operator of offering sports-related contracts without obtaining a license from the New York State Gaming Commission.<\/p>\n\n\n\n New York considers those contracts a form of gambling.<\/p>\n\n\n\n The state sought a temporary restraining order that could have prevented Kalshi from offering event contracts and demanded more than $36 billion in damages.<\/p>\n\n\n\n Kalshi then informed the CFTC that the lawsuit could threaten its ability to operate as a federally registered designated contract market.<\/p>\n\n\n\n That prompted the federal regulator to intervene.<\/p>\n\n\n\n CFTC Chairman Mike Selig signed an emergency order directing KalshiEX to continue operating under the Commodity Exchange Act’s Core Principles.<\/p>\n\n\n\n The decision did not settle the underlying legal dispute.<\/p>\n\n\n\n It did not establish once and for all that prediction markets are exempt from state gambling laws.<\/p>\n\n\n\n Instead, the CFTC argued that a single state should not be able to shut down a federally regulated exchange before courts determine which regulator has authority.<\/p>\n\n\n\n The federal regulator’s argument centers on the structure of Kalshi’s markets.<\/p>\n\n\n\n Users from different states can take opposite sides of event contracts, with trades processed through a centralized exchange and clearing system.<\/p>\n\n\n\n From the CFTC’s perspective, that makes prediction markets interstate financial products.<\/p>\n\n\n\n The agency argues that Congress created the Commodity Exchange Act to provide a national regulatory framework for derivatives.<\/p>\n\n\n\n Allowing individual states to impose separate gambling rules could fragment that national system.<\/p>\n\n\n\n The CFTC also warned that suddenly shutting down an exchange could harm customers who already hold open contracts.<\/p>\n\n\n\n That could leave traders unable to properly settle or close positions and could create broader market stability concerns.<\/p>\n\n\n\n New York is only one front in a much larger conflict.<\/p>\n\n\n\n According to the article, the CFTC has filed lawsuits against Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island and Wisconsin<\/strong>.<\/p>\n\n\n\n The regulator has also participated in related court cases through amicus briefs.<\/p>\n\n\n\n The legal arguments generally follow the same pattern.<\/p>\n\n\n\n States say sports-related prediction contracts are effectively wagers on future events.<\/p>\n\n\n\n Under that interpretation, platforms offering those contracts should obtain state gambling licenses, pay applicable taxes and follow local consumer protection rules.<\/p>\n\n\n\n The CFTC takes the opposite position.<\/p>\n\n\n\n It says event contracts traded on federally registered exchanges are derivatives rather than traditional bets and therefore fall under federal financial regulation.<\/p>\n\n\n\n The distinction may sound technical, but the consequences are significant.<\/p>\n\n\n\n If states win, prediction market companies could be forced to navigate dozens of separate licensing systems.<\/p>\n\n\n\n If the CFTC wins, platforms may be able to operate under one federal framework across the country.<\/p>\n\n\n\n The states’ argument is based heavily on how prediction markets function from a user’s perspective.<\/p>\n\n\n\n A person puts money on whether a future event will happen.<\/p>\n\n\n\n If their prediction is correct, they receive a payout.<\/p>\n\n\n\n That resembles traditional sports betting closely enough that state regulators argue the legal label attached to the contract should not change its economic reality.<\/p>\n\n\n\n States also already regulate casinos, lotteries and sportsbooks.<\/p>\n\n\n\n Those systems generate tax revenue while funding consumer protection and problem gambling programs.<\/p>\n\n\n\n Prediction markets offering similar sports contracts without state licenses could therefore compete with regulated sportsbooks without paying the same taxes or following the same licensing requirements.<\/p>\n\n\n\n That is one reason states have become increasingly aggressive in challenging platforms such as Kalshi.<\/p>\n\n\n\n The CFTC’s response is that Kalshi is fundamentally different from a traditional gambling operator.<\/p>\n\n\n\n Kalshi operates as a federally regulated designated contract market.<\/p>\n\n\n\n Its products are structured as event contracts that are traded between market participants.<\/p>\n\n\n\n The exchange also operates within a financial regulatory system involving clearing requirements, market surveillance and customer protections.<\/p>\n\n\n\n Federal regulators therefore argue that a prediction market contract should be treated as a derivative even when its underlying event involves sports.<\/p>\n\n\n\n This creates one of the most important questions in the entire dispute.<\/p>\n\n\n\n Should a contract be classified according to what people are betting on<\/strong>, or according to how the financial instrument itself is structured and regulated<\/strong>?<\/p>\n\n\n\n Courts may ultimately have to answer that question.<\/p>\n\n\n\n Minnesota has already produced an important ruling.<\/p>\n\n\n\n A court there sided with the state and found that Kalshi’s sports-related contracts could be treated as gambling products subject to state law.<\/p>\n\n\n\n Kalshi appealed the decision, while the CFTC supported the company’s federal regulatory argument.<\/p>\n\n\n\n An appellate ruling could become highly influential because other courts facing similar disputes may look to it for guidance.<\/p>\n\n\n\n The situation becomes even more complicated because cases are developing across several federal circuits.<\/p>\n\n\n\n Different appellate courts could eventually reach different conclusions.<\/p>\n\n\n\n If that happens, the regulatory dispute could ultimately reach the U.S. Supreme Court.<\/p>\n\n\n\n Such a process could take years.<\/p>\n\n\n\n Until then, prediction market operators may continue facing different regulatory treatment depending on the jurisdiction.<\/p>\n\n\n\n Jurisdiction is not the only issue affecting prediction markets.<\/p>\n\n\n\n The industry also faces questions about whether platforms can use third-party information to settle contracts without obtaining permission from the companies providing that data.<\/p>\n\n\n\n FlightAware recently highlighted that problem when it challenged Kalshi’s use of flight-tracking information for markets involving flight cancellations.<\/p>\n\n\n\n Kalshi had identified FlightAware as the source used to determine whether certain flights had been canceled.<\/p>\n\n\n\n FlightAware argued that it had not authorized its data or trademark to be used that way.<\/p>\n\n\n\n Although that particular lawsuit was later withdrawn, the dispute raised an important question that applies across the prediction market industry.<\/p>\n\n\n\n Every prediction market needs a reliable source for determining what actually happened.<\/p>\n\n\n\n Election contracts require official vote results.<\/p>\n\n\n\n Weather markets depend on meteorological data.<\/p>\n\n\n\n Economic markets need government statistics.<\/p>\n\n\n\n Corporate markets may rely on earnings reports.<\/p>\n\n\n\n Sports contracts use official game results.<\/p>\n\n\n\n Flight markets require airline or tracking information.<\/p>\n\n\n\n Many of these datasets come from third parties.<\/p>\n\n\n\n If courts ultimately decide that prediction platforms need explicit commercial permission before using outside data to settle contracts, launching new markets could become more expensive.<\/p>\n\n\n\n Platforms might have to negotiate licensing agreements with data providers before allowing trading to begin.<\/p>\n\n\n\n That could significantly change the economics of the prediction market business.<\/p>\n\n\n\n There is also a broader question about who controls the commercial value of real-world information.<\/p>\n\n\n\n Airlines do not necessarily agree to have flight cancellations turned into financial contracts.<\/p>\n\n\n\n Sports leagues and athletes may not have consented to their performances becoming the basis of prediction markets.<\/p>\n\n\n\n Companies releasing earnings reports may similarly have little control over contracts built around those numbers.<\/p>\n\n\n\n As prediction markets expand into more categories, disputes over data ownership, trademarks and commercial licensing could become just as important as disagreements over gambling regulation.<\/p>\n\n\n\n One of the most striking parts of New York’s lawsuit is the size of its damages claim.<\/p>\n\n\n\n The state is seeking more than $36 billion<\/strong>.<\/p>\n\n\n\n According to the article, the figure appears to reflect Kalshi’s trading activity combined with potential taxes, penalties and other amounts New York believes it could have collected if the platform had operated under a gambling license.<\/p>\n\n\n\n New York imposes one of the highest sports betting tax rates in the country.<\/p>\n\n\n\n Licensed operators reportedly paid an effective rate of approximately 51% on gross gaming revenue in 2025.<\/p>\n\n\n\n The state collected about $2.4 billion in sports betting tax revenue during that fiscal year.<\/p>\n\n\n\n From New York’s perspective, allowing prediction markets to offer comparable contracts without paying gambling taxes creates unfair competition with licensed sportsbooks.<\/p>\n\n\n\n Recovering the entire amount may be unrealistic.<\/p>\n\n\n\n Kalshi’s actual revenue is far smaller than the total value of contracts traded on its platform.<\/p>\n\n\n\n However, the size of the claim sends a clear message.<\/p>\n\n\n\n It shows other prediction market operators how expensive state regulators believe unlicensed activity could become.<\/p>\n\n\n\n It also increases pressure on the federal government and prediction market companies to develop a regulatory structure that gives states some role in oversight.<\/p>\n\n\n\n The economic stakes will only increase as prediction market trading volumes grow.<\/p>\n\n\n\n Polymarket faces many of the same regulatory questions as Kalshi, but its operating structure is different.<\/p>\n\n\n\n Kalshi is based in the United States and operates as a CFTC-regulated designated contract market.<\/p>\n\n\n\n Polymarket operates using blockchain infrastructure on Polygon and largely restricts U.S. users from its main interface following a 2022 settlement with the CFTC.<\/p>\n\n\n\n That creates a two-tier prediction market industry.<\/p>\n\n\n\n Kalshi operates under direct U.S. federal supervision but is increasingly challenged by individual states.<\/p>\n\n\n\n Polymarket operates with a lighter domestic regulatory footprint but cannot openly serve American customers through its main platform.<\/p>\n\n\n\n The outcome of the Kalshi cases could therefore have major consequences for Polymarket.<\/p>\n\n\n\n If courts ultimately agree that prediction markets are federally regulated derivatives, Polymarket could potentially have a clearer route toward regulated U.S. operations.<\/p>\n\n\n\n It could pursue federal registration and operate under a national framework similar to Kalshi.<\/p>\n\n\n\n If states win, the situation would become much more complicated.<\/p>\n\n\n\n Prediction market platforms might need gambling licenses in individual states, particularly for sports-related contracts.<\/p>\n\n\n\n That could make Polymarket’s offshore model more permanent.<\/p>\n\n\n\n The legal outcome could therefore help determine whether the industry develops mainly inside the U.S. financial regulatory system or remains partially offshore.<\/p>\n\n\n\n Polymarket has grown too large for regulators to ignore.<\/p>\n\n\n\n According to the article, the platform processed approximately $4.3 billion in trading volume on its World Cup Winner market alone<\/strong>.<\/p>\n\n\n\n Its monthly trading volume surpassed $8 billion during multiple months in 2026.<\/p>\n\n\n\n That scale shows that prediction markets are no longer a small experimental corner of the financial industry.<\/p>\n\n\n\n They are becoming serious competitors to traditional betting and financial trading platforms.<\/p>\n\n\n\n Prediction markets reportedly captured around 27% of total sports betting activity during the World Cup, compared with less than 5% during the 2022 tournament.<\/p>\n\n\n\n That rapid growth helps explain why both federal and state regulators want control over the industry.<\/p>\n\n\n\n The prediction market industry often presents the dispute as a conflict between efficient federal regulation and unnecessary state interference.<\/p>\n\n\n\n However, states also have legitimate concerns.<\/p>\n\n\n\n Gambling can create real social and economic costs.<\/p>\n\n\n\n States fund programs dealing with gambling addiction, fraud prevention and consumer protection.<\/p>\n\n\n\n They argue that companies offering products that behave like sports betting should contribute to the same regulatory system.<\/p>\n\n\n\n From that perspective, calling a sports wager a derivative does not eliminate the potential harms associated with gambling.<\/p>\n\n\n\n A user can lose money on a prediction market just as they can through a traditional sportsbook.<\/p>\n\n\n\n States therefore argue that the economic substance of the product should matter more than the regulatory registration of the company offering it.<\/p>\n\n\n\n The central problem is that both sides can point to existing law.<\/p>\n\n\n\n The Commodity Exchange Act gives the CFTC authority over derivatives and registered contract markets.<\/p>\n\n\n\n State laws give gaming regulators authority over sports betting and gambling.<\/p>\n\n\n\n Prediction markets sit directly between those two systems.<\/p>\n\n\n\n Sports-related event contracts behave like bets from the user’s perspective but can also be structured as federally regulated derivatives.<\/p>\n\n\n\n That overlap is why the issue is becoming so difficult to resolve.<\/p>\n\n\n\n Courts may eventually need to create a more detailed test for determining which products belong under which regulatory framework.<\/p>\n\n\n\n That test could consider factors such as contract structure, clearing arrangements, margin requirements or the type of event being traded.<\/p>\n\n\n\n Several upcoming developments could determine the direction of the prediction market industry.<\/p>\n\n\n\n One is Kalshi’s effort to move New York’s case into federal court.<\/p>\n\n\n\n A federal judge could potentially be more receptive to the CFTC’s argument that federal commodities law overrides state gambling regulations.<\/p>\n\n\n\n The Minnesota appeal will also be important.<\/p>\n\n\n\n The first major appellate ruling on whether prediction markets should be treated as gambling or derivatives could influence courts around the country.<\/p>\n\n\n\n CFTC rulemaking is another key area to watch.<\/p>\n\n\n\n If the Commission formally defines which types of event contracts qualify as regulated derivatives, it could strengthen its position before the courts finish resolving the issue.<\/p>\n\n\n\n Data licensing will remain another concern as prediction platforms expand into additional categories.<\/p>\n\n\n\n And Polymarket’s regulatory strategy could provide an important signal about where the industry believes the legal battle is heading.<\/p>\n\n\n\n If it seeks CFTC registration, that could suggest confidence in federal control.<\/p>\n\n\n\n If it instead pursues state licenses or continues focusing on offshore markets, it could indicate that the company expects states to retain substantial authority.<\/p>\n\n\n\n For now, the future of U.S. prediction markets remains unsettled.<\/p>\n\n\n\n What started as a niche financial product has become a multibillion-dollar industry sitting at the intersection of derivatives trading, gambling, crypto infrastructure and real-world data.<\/p>\n\n\n\n Whether Kalshi, Polymarket and similar platforms eventually operate under one national regulatory system or dozens of state frameworks may now depend more on judges than lawmakers.<\/p>\n\n\n\n Kalshi and Polymarket face a growing regulatory battle as the CFTC and U.S. states fight over whether prediction markets are derivatives or gambling.<\/p>\n\n\n\n <\/p>\n\n\n\n <\/p>\n","protected":false},"excerpt":{"rendered":" The battle over prediction markets in the United States is no longer just about whether platforms such as Kalshi and Polymarket should be allowed to operate. The bigger question is who actually has the authority to regulate them. Federal regulators say prediction markets are financial derivatives that belong under the Commodity Futures Trading Commission. Several…<\/p>\n","protected":false},"author":3,"featured_media":16008,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[63,70],"tags":[65,86,1463,202],"class_list":["post-16007","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-crypto-news","category-finance","tag-crypto","tag-market","tag-polymarket","tag-prediction"],"yoast_head":"\nWhy the CFTC stepped into the Kalshi fight<\/h2>\n\n\n\n
CFTC says prediction markets are interstate financial markets<\/h2>\n\n\n\n
Nine states are now part of the regulatory battle<\/h2>\n\n\n\n
Why states believe sports prediction markets are gambling<\/h2>\n\n\n\n
CFTC says Kalshi is not a sportsbook<\/h2>\n\n\n\n
Minnesota could become an important test case<\/h2>\n\n\n\n
Third-party data creates another challenge<\/h2>\n\n\n\n
Prediction markets depend heavily on external data<\/h2>\n\n\n\n
Data ownership may become a major issue<\/h2>\n\n\n\n
Why New York is seeking more than $36 billion<\/h2>\n\n\n\n
The $36 billion figure is also strategic<\/h2>\n\n\n\n
Where Polymarket fits into the fight<\/h2>\n\n\n\n
A CFTC victory could open a path for Polymarket<\/h2>\n\n\n\n
Polymarket’s size makes regulation unavoidable<\/h2>\n\n\n\n
The states have a strong consumer protection argument<\/h2>\n\n\n\n
The biggest legal question remains unresolved<\/h2>\n\n\n\n
What happens next<\/h2>\n\n\n\n
Meta Description<\/h2>\n\n\n\n
Focus Keyphrase<\/h2>\n\n\n\n