The Emergence of Sports Prediction Markets
Prediction markets – once niche platforms for trading on elections or awards – are now making inroads into the sports world. On these platforms, users buy and sell event contracts whose payoff depends on a real-world outcome. For example, purchasing a “Yes” contract on a team to win a game pays out if that team wins, much like a bet on that team’s moneyline. Unlike traditional sportsbooks where bettors wager against “the house,” prediction markets function more like exchanges: participants trade contracts with each other at market-driven prices.
In theory, this model differs from sportsbook betting – it’s positioned as trading rather than gambling. In practice, however, when the contracts involve sports results, regulators note it becomes no different than placing a bet through a traditional sportsbook. The lines are blurring between prediction markets and sportsbooks as these new platforms offer contracts that mimic conventional sports wagers.
Blurring the Line Between Exchange and Sportsbook
The appeal of these sports-focused prediction markets is understandable. They provide a new avenue for fans to engage with games, using a financial trading interface instead of a betting slip. Prices on a team’s contract fluctuate like a stock ticker based on live odds, and traders can enter or exit positions at will. In essence, it’s Wall Street meets Las Vegas on Saturday’s big game.
Proponents argue this innovation offers more liquidity and choice – akin to the “exchange betting” models already seen in places like New Jersey. Yet the more these event exchanges expand their sports offerings, the more they resemble traditional sports betting markets and thus require the same integrity and consumer protections as state-regulated sportsbooks.
State regulators and industry observers are taking note. From their perspective, purchasing a contract based on which team a person thinks will win a sporting event is no different than placing a bet through a traditional sportsbook. The only real difference, they argue, is the lack of consumer safeguards – these contracts can be sold to people under 21, with none of the responsible gaming measures or house integrity monitoring that licensed bookmakers must have.
A Legal Gray Area: CFTC Oversight vs. State Gambling Regulation
This crossover into sports has exposed a gray area in U.S. gambling law. Traditionally, sports betting has been regulated at the state level, especially after the fall of PASPA in 2018. At the same time, federal regulators like the Commodity Futures Trading Commission (CFTC) have jurisdiction over derivatives markets – which is how prediction markets classify these event contracts.
The CFTC views them as binary options or futures contracts on events, rather than bets, and regulates exchanges like Kalshi as Designated Contract Markets. This creates an unusual duality: a sports outcome can simultaneously be seen as a regulated commodity contract under federal law, yet be considered an illegal gambling wager under various state laws.
The result is a jurisdictional tug-of-war. From the state perspective, an unlicensed platform taking money on game outcomes is simply unlicensed sports wagering in violation of state laws – no matter if that platform calls the wagers “event contracts” and operates with federal approval.
From the federal side, however, the argument is that legally listed CFTC contracts cannot be restricted by state gambling rules. A recent court ruling agreed with this stance in the context of political markets, holding that elections do not constitute “gaming.” Kalshi and its peers argue that sports contracts should be viewed the same way – as a form of trading activity, not gambling.
But states counter that sports are games by definition, and wagering on their outcomes is unmistakably “gaming.” This gray area has led to an uncomfortable standoff. Are sports event contracts just another financial instrument, or are they bets in disguise? Right now, both are partially true – and that conflict is playing out in real time.
Self-Certification Gambit: Kalshi, Crypto.com and the CFTC’s Non-Intervention
The current showdown was sparked by an aggressive move from prediction market operators. In early 2025, Kalshi self-certified a suite of sports-related contracts – essentially notifying the CFTC that it intended to list markets on events like March Madness and the Super Bowl. Under CFTC rules, exchanges can self-certify new contracts, which then go live unless the Commission objects.
The CFTC declined to review Kalshi’s contracts, allowing them to take effect. Crypto.com similarly self-certified Super Bowl contracts. Even Robinhood got involved by offering Kalshi’s markets via its app – until quietly pulling the plug following regulatory pressure.
For prediction market companies, the lack of intervention signaled a tacit green light. Kalshi has publicly argued that since the CFTC did not object, the contracts are lawful under federal law unless and until otherwise stated. In Kalshi’s view, the CFTC’s silence is approval.
State regulators saw it differently. By early 2025, ads were appearing touting “legal sports betting in 50 states” via these platforms. Regulators felt they had no choice but to step in.
State Crackdown: Unauthorized Wagers in the Crosshairs
Major gambling states launched enforcement actions. Nevada ordered Kalshi to cease operations, stating that offering such contracts is illegal unless licensed. New Jersey followed with cease-and-desist letters. Ohio determined that Kalshi, Robinhood, and Crypto.com were offering unauthorized sports gaming. Illinois echoed that sentiment, warning of criminal penalties.
Even states without legal sports betting launched probes – including Massachusetts and Connecticut. Regulators emphasized that these offerings lack the safeguards found in legal sportsbooks. Congresswoman Dina Titus called out the threat to state tax revenue and consumer protections.
Major sports leagues also raised integrity concerns. MLB noted that while current contracts may pose limited risk, a trend toward more exotic wagers increases the need for sportsbook-style protections. Tribal authorities voiced concerns over sovereignty violations, and the American Gaming Association argued that prediction markets represent unfair economic competition.
Federal vs. State: Lawsuits and a Looming Showdown
Kalshi has filed lawsuits against New Jersey and Nevada, claiming federal law preempts state authority. The argument: CFTC-regulated exchanges are allowed to operate nationwide, and states are overreaching by trying to apply gambling laws.
State officials push back, arguing that Congress never intended to displace states’ control over gambling. Even Acting CFTC Chair Caroline Pham has acknowledged that gambling regulation has traditionally been a state issue.
If Kalshi prevails, it could establish a precedent allowing prediction markets to operate freely under federal oversight – potentially undermining the existing sports betting framework. If states win, these contracts may be banned, or prediction markets forced to apply for gambling licenses. Either way, a Supreme Court showdown seems likely.
Threat to the Legal Gaming Industry and State Tax Bases
From the legal industry’s perspective, the rise of prediction markets raises red flags. These platforms currently sidestep key requirements: age verification, responsible gaming tools, tax contributions, and data sharing with leagues. This opens the door to underage gambling, integrity threats, and unreported suspicious activity.
Economically, prediction markets could siphon off customers and revenue. Legal operators pay license fees, taxes, and compliance costs; unlicensed competitors do not. This undermines the investment made by regulated businesses and threatens the public programs supported by tax revenue.
Tribes face both financial harm and sovereignty violations. In states where tribes hold exclusivity, prediction markets operating via federal channels effectively cut them out.
The CFTC’s Dilemma and Possible Paths Forward
The CFTC has announced a public roundtable to reassess prediction markets. It faces a complex balancing act: foster innovation while protecting consumers and respecting states’ rights.
Potential outcomes include:
- A federal clampdown on sports contracts,
- Conditional approval with safeguards,
- Continued uncertainty and reliance on courts,
- Or integration into the existing gaming system via licensed sportsbook adoption.
Encouragingly, the CFTC is considering all sides – including constitutional law, consumer safety, and market impact. A coordinated solution may emerge that honors both innovation and integrity.
Balancing Innovation and Integrity: Stephen Crystal’s Take
As a gaming industry veteran, I’ve seen new technologies challenge the regulatory status quo time and again. Prediction markets represent a genuine innovation, but one that cannot exist outside a framework of consumer protection, tax fairness, and industry integrity.
Innovation is welcome. But it must operate within the rules. The challenge before us is crafting a consistent regulatory umbrella – one that fosters growth without undermining the system we’ve worked so hard to build.
We don’t need to fear prediction markets. We just need to ensure they’re playing the same game, by the same rules, as everyone else in the sports betting industry.
Stephen Crystal is the founder of SCCG Management and a longtime gaming industry executive and consultant.
Sources:
Court rulings related to prediction markets and the Commodity Exchange Act
Kalshi regulatory filings and lawsuits
CFTC public statements and roundtable announcement
Statements from the Ohio Casino Control Commission
Letters from the American Gaming Association to the CFTC
Congressional statements from Rep. Dina Titus
MLB letter to the CFTC
New Jersey Division of Gaming Enforcement rulings
Nevada Gaming Control Board announcements
Media coverage from Legal Sports Report, ESPN, and others
