Prediction Markets at a Crossroads: The Federal-State Regulatory Clash
-
October 22, 2026
-
Prediction markets have made headlines throughout 2026. Each week has brought a new development: market-implied views on the likelihood of future events, reports of traders profiting from non-public information, and jurisdictional disputes among federal and state regulators seeking authority over this rapidly growing market. At the center of the debate are fundamental questions about whether certain prediction market contracts should be treated as federally regulated derivatives or state-regulated gambling products, the extent to which federal law preempts state authority, and which regulatory framework is best positioned to address consumer protections and market integrity concerns. This article outlines the market’s development and the evolving regulatory contest.
Although prediction markets have existed for decades, the sector expanded rapidly following court decisions and regulatory developments that enabled platforms such as Kalshi and Polymarket to offer event-based contracts to U.S. consumers. By 2026, the industry had grown into a multi-billion-dollar market, attracting increased attention from regulators, lawmakers and state gaming authorities.1,2
Prediction market platforms offer event contracts on subjects ranging from the Academy Awards to daily snowfall.3 Some resemble financial instruments; others closely resemble gambling, blurring traditional regulatory lines. Yet sports contracts have generated the most intense debate, undoubtedly because of the revenue at stake. Sports and parlays account for 80% of Kalshi’s overall volume.4 The resulting federal-state conflict could materially reshape both prediction markets and sports wagering.
The Regulatory Divide
At its core, the dispute pits states’ traditional authority over gambling against the exclusive jurisdiction of the U.S. Commodity Futures Trading Commission (“CFTC”) over federally regulated derivatives markets. States contend that sports event contracts are essentially sports betting and should comply with state licensing, consumer protection, responsible gaming, and tax regimes.5 Kalshi and the CFTC contend that qualifying contracts are swaps governed by the Commodity Exchange Act, which grants the CFTC exclusive jurisdiction over swaps traded on designated contract markets and authorizes it to prohibit certain event contracts that it determines are contrary to the public interest.6,7
The federal position emphasizes uniform national standards; the state position emphasizes states’ longstanding role in regulating gambling. The U.S. Securities and Exchange Commission (“SEC”) entered the discussion on June 18, 2026, when it and the CFTC jointly requested comment on derivatives definitions and interpretive issues, including event-based products.8 The immediate jurisdictional fight, however, remains primarily between the CFTC and the states.
States have increasingly turned to litigation to challenge sports event contracts. A coalition of 38 attorneys general argued in an amicus brief in a case involving Kalshi that the company's offerings constitute sports betting subject to state regulation and that prediction-market contracts bypass established gambling frameworks that generate tax revenue and fund responsible-gaming initiatives and other public programs.9 Several courts have sided with state regulators, while federal appellate courts have reached differing conclusions regarding whether the Commodity Exchange Act preempts state gambling laws and whether sports event contracts qualify as swaps. The resulting circuit split has intensified pressure for definitive guidance from the U.S. Supreme Court.
The CFTC maintains that federal oversight is necessary to preserve a uniform national market and has actively defended its jurisdiction through litigation, regulatory actions and public statements asserting federal authority over prediction-market contracts. The agency argues that federal supervision provides consistent market-integrity and anti-manipulation protections across jurisdictions.10 The SEC’s role is narrower because many event contracts lack a securities nexus, although the SEC’s joint request for comment with the CFTC signals an effort to clarify certain jurisdictional boundaries.11
Neither regulatory model is costless. A predominantly federal framework could promote consistent rules, deeper liquidity, and more predictable nationwide access. It could also broaden the CFTC’s responsibilities and limit tax revenue that states would otherwise collect from sports gambling. A state-centered approach would preserve traditional gambling oversight and locally tailored consumer protections, but it could produce inconsistent rules, varying product availability, and fragmented liquidity.
Federal courts have already reached divergent results in cases involving prediction markets. That split has led to the possibility of involvement by the Supreme Court – on September 2, 2026, New Jersey petitioned the Supreme Court to decide whether prediction markets can offer sports-related contracts without following states’ gambling laws or whether CFTC oversight preempts state gambling laws.12 Resolution could also come through agency rulemaking, congressional action, or negotiated outcomes.
Until greater clarity emerges, firms should monitor legal and regulatory developments, maintain flexible compliance frameworks, and prepare contingency plans for jurisdiction-specific restrictions or product changes. Market participants should keep a current inventory of where they operate and ensure that controls can be adapted quickly as courts and regulators redefine the boundaries of federal and state authority.
The contributors would like to thank Ashleigh Szydlowski for contributing to this article.
Footnotes:
1: MT NewsWires, “Market Chatter: Kalshi Surpasses $4 Billion in Annualized Revenue Amid World Cup Boost,” Yahoo!Finance (Aug. 12, 2026).
2: Saini, Manya, “Prediction market platform Polymarket tops $1 billion in annualized revenue, source says,” Reuters (June 26, 2026).
3: Gratton, Peter, “Event Contracts: What They Are and How They Are Used,” Investopedia (Oct. 1, 2026).
4: Cohen, Marshall, “Young adults under 21 traded $5 Billion on Kalshi this year, amid prediction market frenzy,” CNN (Aug. 28, 2026).
5: National Conference of State Legislatures, “Prediction Markets: A New Frontier in State Regulatory Authority” (Mar. 12, 2026).
6: Highman, Mark, et. al, “CFTC advances regulatory framework for prediction markets,” Norton Rose Fulbright (Mar. 2026).
7: U.S. Commodity Futures Trading Commission, “Understanding Prediction Markets and Event Contracts” (n.d.), and “Commodity Exchange Act & Regulations” (n.d.).
8: Mascianica, Scott F. and Bastnagel, Andrew, “Is the SEC Entering Fight Over Prediction Market Oversight?” Bradley (June 25, 2026).
9: Office of the New York Attorney General, Press Release, “Attorney General James Joins Bipartisan Coalition Defending States' Gambling Laws Against Prediction Markets” (Apr. 24, 2026).
10: Commodity Futures Trading Commission, Press Release, “CFTC Sues New Mexico as the State Becomes the Latest Attempting to Infringe on Federal Jurisdiction” (June 12, 2026).
11: U.S. Securities and Exchange Commission, Press Release, “SEC, CFTC Seek Public Comment to Further Clarify and Harmonize Derivatives Product Definitions” (June 18, 2026).
12: New Jersey Office of the Attorney General, Press Release, “AG Davenport: SCOTUS Must Resolve States’ Authority to Regulate Sports Gambling on Prediction Markets” (Sept. 2, 2026).
The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
Related Insights
Published
October 22, 2026
Key Contacts
Senior Managing Director
Managing Director
Managing Director