The Legal Framework of Prediction Markets: U.S. Focus with a Global Lens

Prediction markets sit at the intersection of finance, gambling law, and emerging technology, which makes their legal status far more complex than a typical betting site or brokerage account. In the U.S., some platforms operate as fully regulated derivatives exchanges under federal commodities law, while others exist in gray zones that state regulators increasingly view as unlicensed gambling. At the same time, Europe, the UK, and other regions often treat similar products either as high‑risk financial instruments or as remote betting, layering on additional licensing and compliance burdens. Understanding how these overlapping regimes fit together is essential for anyone building, investing in, or actively trading on prediction market platforms in 2026.

What Prediction Markets Are in Legal Terms

Event Contracts vs. Gambling Products

Legally, most real‑money prediction markets in the U.S. are structured as event contracts or derivatives under the Commodity Exchange Act (CEA), not as traditional gambling bets.

These contracts pay out based on objectively verifiable future events (elections, economic data, sports results), and when listed on a CFTC‑regulated venue they are treated as commodity derivatives rather than casino-style wagers.

However, because event contracts often resemble binary bets, state gaming regulators and courts continue to debate whether certain markets (especially political and sports contracts) cross the line into “gaming” or unlawful wagering.

Core Legal Question: Derivatives vs. Gambling

U.S. law draws a contested boundary between CFTC‑regulated derivatives (under the CEA) and state‑regulated gambling, with prediction markets sitting precisely on that line.

The CEA gives the CFTC exclusive jurisdiction over futures and options on commodities, including many event contracts, but it also authorizes the Commission to prohibit contracts that involve “gaming” or are contrary to the public interest.

This dual mandate means the same product can be seen as a legitimate hedging instrument in federal derivative law and as illegal gambling under state law, creating ongoing legal tension and litigation risk.

U.S. Federal Regulation: CFTC and the Commodity Exchange Act

CFTC Oversight of Event Contracts

In the U.S., the Commodity Futures Trading Commission (CFTC) is the primary federal regulator for real‑money prediction markets that operate as designated contract markets (DCMs) or swap execution facilities (SEFs).

Platforms like Kalshi have been approved as DCMs, allowing them to self‑certify and list event contracts, subject to CFTC review and the agency’s power to reject contracts deemed “gaming” or contrary to the public interest under Section 5c(c)(5)(C) of the CEA.

The CFTC historically scrutinized political and sports contracts, but in early 2026 it withdrew a proposed 2024 ban on such markets and signaled a more permissive approach paired with formal rulemaking.

Recent CFTC Policy Shift (2024–2026)

Between 2023 and 2025, the CFTC attempted to restrict certain political markets, including Kalshi’s congressional control contracts, arguing they were gambling-like and contrary to public interest, which led to high‑profile court challenges.

In late 2024, a D.C. federal court ruled against the CFTC’s attempt to block Kalshi’s congressional contracts, finding the agency’s interpretation of “gaming” overly broad and not supported by the statute’s ordinary meaning.

By early 2026, new CFTC leadership announced it would withdraw prior staff advisories and the 2024 proposed prohibition rule, commit to fresh event‑contract rulemaking, and assert its exclusive authority over CFTC‑registered prediction markets in federal–state disputes.

Federal Preemption vs. State Authority

The CEA grants the CFTC exclusive jurisdiction over trading and clearing of commodity derivatives on registered exchanges, but it does not expressly preempt all state gambling and consumer‑protection laws.

In current litigation, the CFTC argues that states cannot require separate gambling licenses for properly registered CFTC markets, framing state efforts as an intrusion into federally preempted space.

States counter that they retain power to ban or restrict gambling‑like activity within their borders and to regulate marketing, consumer protection, and taxation, even if the platform is federally supervised as a derivatives exchange.

U.S. State‑Level Regulation and Enforcement

Patchwork State Treatment

Despite federal oversight, the practical legality of prediction markets for end‑users is heavily influenced by state law, leading platforms to implement state‑by‑state access restrictions.

Many CFTC‑regulated markets voluntarily block or limit trading from states with aggressive gambling enforcement or unclear rules, creating a geographic patchwork similar to early U.S. online sports betting.

State attorneys general have begun using gambling, consumer‑protection, and unfair‑competition statutes to investigate or challenge event‑contract platforms, especially around sports and political markets.

States Actively Restricting or Targeting Prediction Markets

Several states have moved aggressively against prediction markets, either through attorney‑general actions, regulator letters, or proposed legislation.

Because these laws and lawsuits are evolving, most platforms use IP and KYC‑based geolocation to block users where regulators have taken the most aggressive stance and adapt their state‑eligibility lists as new bills or court orders emerge.

Sports Prediction Markets vs. Sports Betting

When event contracts reference sporting events, they sit in direct tension with state‑licensed sportsbooks, which often enjoy statutory exclusivity or tightly controlled licensing regimes.

Since early 2025, Kalshi and similar platforms have offered sports contracts without CFTC enforcement, prompting states like Nevada, New Jersey, and Maryland to assert that these products amount to unlicensed sports betting under their laws.

This conflict has produced more than 20 lawsuits across at least seven states, with some courts siding with federal preemption and others upholding state authority, making sports prediction markets the flashpoint in the broader legal showdown.

Political Markets and Public‑Policy Concerns

Political prediction markets attract special scrutiny because regulators worry they may incentivize election manipulation or undermine confidence in democratic processes.

The CFTC’s abandoned 2024 proposal would have broadly banned political event contracts, but courts and new leadership have pushed toward a more nuanced approach that weighs public‑interest concerns against market benefits.

Some states independently prohibit wagers on elections, so platforms often geofence those jurisdictions even if federal law ultimately allows political contracts on CFTC‑regulated exchanges.

Enforcement Risks and Compliance Obligations

Market Manipulation and Insider Trading

Prediction markets face growing enforcement risk around manipulation and insider trading, especially for contracts tied to economic releases, corporate actions, or major litigation outcomes.

Guidance from enforcement‑focused law firms highlights that traders who use material non‑public information in event contracts can face liability under commodities, securities, or general fraud statutes, much like in traditional markets.

Operators are expected to deploy surveillance tools, suspicious‑activity alerts, and robust audit logs to detect wash trading, spoofing, or coordinated attempts to move prices for reputational or financial gain.

AML, KYC, and Sanctions

Real‑money prediction markets must comply with AML and KYC obligations similar to other financial platforms, including identity verification, sanctions screening, and suspicious‑activity reporting.

Crypto‑native venues that serve U.S. residents without full AML programs risk enforcement not only from the CFTC but also from FinCEN and state regulators, even if they are technically based offshore.

Increasing coordination between state AGs and federal agencies suggests that AML failures, not just gambling‑law violations, are likely to be a major enforcement theme through 2026.

Advertising, Disclosures, and Consumer Protection

Beyond gambling law, state AGs can challenge prediction markets under general consumer‑protection rules, scrutinizing how platforms market “low‑risk” trading, bonus offers, or implied success rates.

Best‑practice compliance now includes prominent risk warnings, clear fee schedules, simple explanations of settlement rules, and avoidance of misleading language that blurs the line between probabilistic forecasts and guaranteed outcomes.

Global Perspective: EU, UK, and Other Jurisdictions

European Union: Financial vs. Gambling Regulation

In the EU, prediction markets do not have a dedicated legal category; instead, event contracts may qualify as MiFID II financial instruments if structured as derivatives, or as gambling products under member‑state law.

ESMA’s historic crackdown on binary options and high‑risk contracts for difference has made regulators wary of retail‑facing binary payoff products, indirectly shaping a cautious stance toward prediction markets that look like speculative binaries.

United Kingdom: FCA and Gambling Commission

The UK’s FCA permanently banned the sale of retail binary options in 2019 due to repeated evidence of consumer harm, which would heavily constrain any attempt to market event contracts as investment products.

If structured as bets instead of investments, prediction markets would fall under the UK Gambling Commission, requiring remote betting licenses, strict responsible‑gambling controls, and compliance with advertising and affordability rules.

Other Regions (Canada, Asia-Pacific)

In many jurisdictions outside the U.S. and Europe, prediction markets are treated either as online gambling requiring local licenses or they operate from offshore hubs in legal gray areas.

Because domestic law in these regions is evolving, both operators and users face the risk that previously tolerated products could later be reclassified as illegal gambling or unlicensed financial services.

Future Trajectory: What’s Next Legally for Prediction Markets

Imminent CFTC Rulemaking

The CFTC has announced that it will undertake a dedicated rulemaking on event contracts, aiming to define which prediction markets are permissible financial instruments and which must be prohibited as gaming.

Observers expect the rules to directly address political and sports markets, clarify public‑interest tests, and better articulate how federal oversight should coexist with state gambling regimes.

Federal–State Court Battles

Ongoing lawsuits in Nevada, New Jersey, Maryland, Massachusetts, New York, and other jurisdictions will shape whether state regulators can effectively ban or license CFTC‑registered prediction markets, or whether federal law preempts those efforts.

If appellate courts or the Supreme Court ultimately favor broad CFTC preemption, nationally uniform access could emerge; if they instead affirm state authority, the industry will likely remain fragmented along state lines.

Convergence with Mainstream Finance

Legal and policy commentary increasingly frames prediction markets as part of a broader move toward “event‑based finance,” where businesses hedge non‑price risks like elections, weather, and regulatory outcomes.

If regulators manage to carve out a stable derivatives‑style framework with strong consumer protections, prediction markets may evolve from gray‑area products into standard tools within regulated capital markets and risk‑management strategies.