By Braeden Anderson & Khoa Nguyen
Prediction markets were once on the margins of financial innovation, but that era is over. Sports-linked event contracts have become the flashpoint for a rapidly escalating conflict between federal commodities regulators, state gaming regimes, and the multibillion-dollar sportsbook industry. The dispute is often characterized as a preemption fight, and in one sense it is. But the deeper story is that prediction markets are forcing regulators, courts, and market participants to confront a more foundational question: which institutions should govern products that increasingly resemble sport- gambling, yet operate through the mechanics of exchange-traded derivatives?
The Commodity Futures Trading Commission’s early moves under Chairman Michael S. Selig suggest that the agency is preparing to address the question as a market-structure issue, not merely an episodic enforcement problem. Selig was sworn in as Chair in late December 2025, and shortly thereafter, the Commission announced that he had launched the Innovation Advisory Committee, a reconstituted version of the former Technology Advisory Committee.[1] The press release describes the committee as a vehicle to gather expertise and recommendations for innovation in the financial markets from a group that represents a balance of perspectives across the financial industry, its regulators, financial technology providers, public interest groups, academia, and market infrastructure firms. Selig also states his intention to nominate the CEO Innovation Council participants as charter members, signaling an effort to integrate high-level market structure input into the Commission’s policymaking process.
Selig’s framing is notable for its clarity. He explains how “novel technologies are enabling the creation of entirely new products, platforms, and businesses.” He also emphasizes that, under his leadership, the Commodity Futures Trading Commission (CFTC) will develop “fit-for-purpose market structure regulations” and “clear rules of the road” for what he describes as a “new frontier of finance.” Read in context, the CFTC intends to engage proactively with the structural changes occurring in derivatives markets, rather than regulating emerging products primarily through retrospective enforcement. The committee’s anticipated subject matter, including tokenization, 24/7 trading, perpetual-style products, prediction markets, and blockchain-native market infrastructure, underscores that the Commission views these developments as introducing core market-structure questions that will shape the next generation of regulated financial venues.
Prediction markets, and the sports-linked contracts at issue in the Kalshi disputes, sit at the center of this shift. They occupy a contested space between two robust regulatory systems: federal commodities oversight and state gambling authorities; and represent the struggle between two powerful industries: the established sportsbook that dominate state-regulated gaming and the exchange-based market infrastructure that underlies the U.S. derivatives markets. Thus, the legal conflict is not simply about whether a particular product is permissible, but rather which regime has the authority to define the product category in the first place. That authority carries with it practical consequences. It determines who writes the rules, who enforces them, who collects the revenue, and, ultimately, whether a national market structure can exist at scale, or whether it must be litigated and regulated state-by-state.
States have only recently been allowed to regulate their own sports-gambling markets. On the heels of the Pete Rose’s betting scandal, Congress passed the Professional Amateur Sports Protection Act of 1992 (PASPA) which did not forbid sports gambling itself, but did prohibit the states from regulating and legalizing sports gambling if they had not already done so. The statute did not, however, create a legal framework for federal oversight of this industry, nor has Congress acted in this area since then. In 2014, New Jersey attempted, for the second time, to pass legislation to legalize sport gambling, resulting in the state getting sued by the NCAA, NFL, NBA, NHL, and MLB for violating PAPSA. After a protracted legal battle that was waged all the way to the Supreme Court, PAPSA was struck down as an unconstitutional usurpation of the states’ powers to legalize gambling. Justice Alito’s opinion sums up the rule thusly: “Congress can regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own.” [2]
Today, thirty-eight states have legalized and regulated sports gambling. This has resulted in a patchwork of regulation with states having different age requirements, banning particular types of bets (such as wagering on in-state teams, or so-called “prop bets” on individual athletes), and sometimes permitting only tribal-sponsored online sports betting.[3] Currently, there is still no federally regulated framework with respect to sports gambling. The consequent doctrinal uncertainty is already visible in the divergent approaches taken by courts and regulators. Their recent decisions are the product of sharply different interpretive lenses, including an emphasis on the structure of federal commodities regulation framework, the preservation of traditional state police powers over gambling, and the textual interpretation of the Commodity Exchange Act’s definitional provisions. This fragmentation highlights the difficulty of resolving event contract disputes through case-by-case litigation alone. It also increases pressure on the Commission to provide a coherent policy and rulemaking framework that market participants can operate in, particularly as states gaming regulators continue to challenge sports-linked event contracts, while sportsbook operators mobilize to protect their market position.
A classification problem is at the heart of the dispute. Specifically, should sports-linked event contracts be regulated based on how they “look and feel” to a retail consumer, or on how they are defined, structured, executed, and supervised under federal financial law? Both sportsbook operators and state regulators have advanced the intuitive argument that event contracts are simply sports wagers in different form[4]. But U.S. financial regulation has never been governed by intuition alone. It is built on statutory categories, contractual structures, and venue-based distinctions. For example: a total return swap can replicate the economics of holding a stock without becoming an equity interest; an option contract can resemble insurance without falling under state insurance code; and a credit default swap can mirror credit exposure without becoming a bond. In each case, economic similarities do not collapse the legal classification. The governing regime is attached to what the product is under statute and contract, not to its superficial resemblance to a different product class.
The Commodity Exchange Act (CEA) reflects that technical architecture. It contemplates event contracts, grants the CFTC exclusive jurisdiction over certain derivatives traded on registered venues, and permits designated contract markets to self-certify new contracts subject to Commission review. At the same time, Congress preserved a mechanism for the Commission to identify categories of contracts that intersect with gaming or other public interest concerns. Section 5c(c)(5)(C) of the CEA, along with CFTC Regulation 40.11, provide a framework under which the Commission may prohibit certain event contracts, including those involving gaming, unlawful conduct, or other activity the Commission deems contrary to the public interest. The statutes thus creates a structured, technical decision point. The question is not whether the product resembles gambling, but whether it fits within the federally regulated derivatives framework, and whether it triggers the Commission’s public interest authority to disallow particular categories.
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While the preemption and classification battles continue, a parallel development is accelerating: market-structure and consumer-protection scrutiny. Plaintiffs and regulators are increasingly focusing not only on whether event contracts are lawful, but also how prediction markets function in practice. That includes questions about liquidity provision, counterparty transparency, order matching, affiliated entities, fee structures, latency advantages, position limits, and how risk is presented to retail users. These issues are familiar in traditional financial markets where the presence of professional market makers and sophisticated liquidity providers is a standard feature of exchange trading. But prediction markets offered through consumer-facing interfaces raise different questions about expectations and disclosure. A retail user may believe they are “betting” against another individual when, in reality, they are trading in a professionally intermediated market with institutional participants operating under different economic incentives and with more advanced technological capabilities. That mismatch between perception and market reality creates litigation and regulatory risk independent of the jurisdictional question.
These consumer-protection dynamics also reflect a broader convergence between sportsbook operators and prediction market platforms. Sportsbook operators are exploring prediction-style products, while federally regulated event contract markets are increasingly adopting user experiences that resemble gaming interfaces. As the boundary between the two collapses, so does the ability to treat the dispute as a purely technical question of statutory interpretation. The conflict becomes simultaneously legal, political, economic, and reputational. Sportsbook operators have built businesses under strict state licensing frameworks, with substantial compliance obligations and significant tax exposure. Federally regulated exchanges can scale nationally under a different regulatory model. That structural asymmetry helps explain why incumbent gaming interests are pushing aggressively to characterize event contracts as wagers dressed in financial-market clothing.
In this context, it is not useful to reduce the debate to whether Chairman Selig is “pro-Kalshi” or “anti-Kalshi.” The important question is whether the Commission will defend its institutional lane where the statute supports it and, equally important, whether it will supply the market with clear rules. The CFTC’s posture will determine whether prediction markets can develop as a stable, federally regulated product category or remain trapped in a cycle of state-level challenges, litigation, and inconsistent outcomes. Selig’s emphasis on “fit-for-purpose” regulation and “clear rules of the road” indicates an awareness that modern market structure cannot be governed indefinitely through informal signaling or regulation by enforcement. The Commission’s advisory architecture, including the Innovation Advisory Committee and the CEO Innovation Council, can serve as the mechanism for building the record, technical foundation, and policy rationale necessary to support durable rulemaking.
The practical implications for market participants are immediate. Operators that rely on institutional liquidity providers should consider enhanced disclosures regarding market structure and counterparty dynamics. Platforms that adopt sportsbook-like marketing or user interfaces should expect increased scrutiny, even if their contracts satisfy the technical criteria for listing on a federally regulated venue. Firms entering the space, whether as exchanges, market makers, brokers or technology providers, should anticipate heightened expectations around surveillance, governance, transparent rulebooks and operational resilience. These are not merely best practices; they are likely to become the dividing line between platforms that can sustain regulatory confidence and those that invite enforcement and consumer-protection litigation.
Prediction markets now sit at the center of a broader realignment between federal financial regulation and state gambling regulation. The litigation unfolding across jurisdictions presents a statutory question, but also a philosophical one: should products be governed by surface resemblance or by the legal and market-structure architecture that Congress has established for derivatives markets? As more institutional actors enter the space, and as regulators expand their focus to market integrity and retail protection concerns, the landscape will continue to evolve quickly. The Commission’s early signals under Chairman Selig suggest that the CFTC intends to play a leading role in that evolution. The market is watching to see whether those signals translate into a clear, operational framework capable of withstanding the inevitable resistance from both state authorities and industry power-players.
[1] Press Release, Commodity Futures Trading Commission, Chairman Selig Launches the CFTC Innovation Advisory Committee (January 12, 2026),
[2] Murphy v. NCAA, 584 U.S. 453, 486 (2018)
[3] Schneider, Karl E., Sport Gambling and Consumer Finance, congress.gov (September 12, 2024)
[4] Cease and Desist Notice, Maryland Lottery and Gaming Control Commission, Re. KalshiEX LLC, (April 7, 2025), (“[T]he purchase of the contract is indistinguishable from the act of placing a sports wager.”)
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