In recent months, global entertainment and sports superstars from Lebron James and Timothée Chalamet to Sydney Sweeney, Giannis Antetokounmpo and Lionel Messi have all attached their names, images, and considerable marketing power to “prediction market” platforms. Prediction markets, such as Kalshi, Polymarket, or Novig, present themselves as a new take on an old concept—a sophisticated model for monetizing the outcome of a sporting or other event that is akin to trading futures in a regulated market.
Some state regulators call that gambling. Federal regulators disagree. The question is not so much who is right but who gets to decide, and that question is actively playing out in courts—with differing results—throughout the country. For the prediction markets themselves, and their backers and participants, the stakes could not be higher.
Of course, these classification questions are not exactly new. Only a few years ago, courts were faced with determining whether poker games and fantasy sports platforms were permissible “games of skill” or illegal gambling activity. For example, in U.S. v. DiCristina, 726 F.3d 92 (2d Cir. 2013), the Second Circuit reversed the judgment of U.S. District Judge Jack B. Weinstein, who had set aside a guilty verdict against defendants under the federal Illegal Gambling Business Act (IGBA) for operating a for-profit Texas hold’em club in the back room of a warehouse in Staten Island on the grounds that poker was a “game of skill” not chance, and thus not gambling.
But the distinction was academic according to the appellate court because the IGBA, though a federal statute, expressly incorporated state laws defining illegal gambling activity, which in New York included poker. On the other hand, in White v. Cuomo, 38 N.Y.3d 209 (2022), New York’s highest court rejected a challenge that a state law allowing interactive fantasy sports (IFS) contests constituted prohibited sports gambling, reasoning that IFS contests are not games of chance nor sports wagers, but rather games of skill that depend on the influence of the individual participants.
Those prior disputes ultimately turned on controlling state law considerations. In the fight over whether prediction market transactions relating to the outcome of sporting events constitute impermissible gambling, however, state law and federal law are in conflict. Meanwhile, federal courts throughout the country have been unable to reach a consensus on this matter, leading to a potential showdown in the U.S. Supreme Court.
Perhaps unsurprisingly, politics are also a factor. The Trump administration, spearheaded by Commodity Future Trading Commission (CFTC) Chairman Michael Selig, has taken a firm stance on the matter, arguing that these prediction markets should be governed solely by CFTC regulations. In court filings and official public pronouncements, the CFTC asserts that the Commodity Exchange Act (CEA), and further amendments under the Dodd-Frank Act, provide it exclusive jurisdiction over prediction markets as a result of its authority to regulate “swaps” and similar “financial contracts that derive their value from an underlying commodity.”[1]
This position, and the CFTC’s actions more broadly under Chairman Selig, mark a complete reversal from the approach of the CFTC under President Biden, which largely opposed election and sports prediction trading.
The prediction markets, in line with this guidance from the executive branch, assert that transactions predicting the result of a sporting event (e.g., whether the New York Knicks will win their next game) are a particular type of swap known as an “event contract.” As the CFTC itself describes, event contracts themselves are not new and “are often based on yes-no scenarios.”[2]
Historically, this model allows individuals to trade in the potential outcome of an event by purchasing a contract for one outcome or another, with the contract price determined by general market expectations. One purpose of these event contracts is to hedge against the risk of an event occurring that has some adverse effect in the real world.
In this way, the trader who might be negatively affected by the occurrence of the event (say, the impact of rain on certain crop yields), can hedge against the financial harm from that event by buying a position in whether it will occur. Another purpose is simply to permit traders to profit from speculation in a transparent, regulated market.[3]
Prediction markets can also use the event contract mechanism to offer individuals the opportunity to trade on matters of public concern, ranging from election results, sporting outcomes, and climate events to economic trends and pop culture happenings. The CFTC believes this can “help the public forecast, plan for, hedge, and even harness perceptions of future events.”[4]
Pursuant to its regulatory authority over derivative contracts, the CFTC only permits trading of event contracts to occur on platforms that are registered with the CFTC as a Designated Contract Market (DCM). In March 2026, the CFTC issued an Advisory making it clear that sports-related outcomes may generally be traded on approved DCMs like any other event contract. (CFTC Letter No. 26-08).
Against this backdrop, the states have long maintained a patchwork of differing regulations relating to gambling generally and sports betting in particular, including whether, where, what type, and under what circumstances sports betting may occur. Recently, numerous states have taken direct action against prediction markets that offer sports-related event contracts pursuant to their well-established regulatory authority over sports gambling, ranging from cease-and-desist demands to administrative and court enforcement proceedings. This, in turn, has prompted the platforms to fire back, seeking declaratory and injunctive relief against state enforcement.
The federal government has also taken sides, and its stance is clear—the CFTC’s authority over prediction markets preempts state regulation. In a particularly forceful response, the CFTC itself has sued at least nine different states in an attempt to prohibit them from regulating sports-related prediction market trades as gambling.
As these disputes have made their way to the federal Courts of Appeal, no clear answer has emerged. In April, the Third Circuit, in a 2-1 decision, upheld Kalshi’s injunction against New Jersey state officials, holding that Kalshi would likely succeed in arguing that the CEA preempts New Jersey’s state gambling laws because Congress granted the CFTC clear jurisdiction over trades conducted on DCMs.[5]
As other lawsuits have progressed, however, a split has emerged, with the Ninth and Sixth Circuits both ruling in favor of states’ abilities to regulate in this space. The Ninth Circuit agreed that the CEA provides the CFTC with exclusive jurisdiction over derivative contracts, but rejected the notion that sports-related prediction trades constitute “swaps” as understood in the statute. Instead, the Court determined that these trades are indistinguishable from wagers in form and substance, noting that even Kalshi has marketed its offerings as legal sports betting.[6]
The Sixth Circuit, meanwhile, held that the CFTC’s exclusive jurisdiction over DCMs and derivatives trading does not, by itself, preempt or limit state regulation of what a state may deem sports betting, as both federal and state regulation can coexist.[7]
Additional cases are pending before the Second, Fourth, Seventh, Eighth, and Tenth Circuits. In an effort to bring needed clarity to this issue, on October 7, 2026, a coalition of 39 states and the District of Columbia filed a brief with the U.S. Supreme Court, urging the high court to resolve this “national turf war … pitting the States against the federal government.”[8] To further illustrate the pace at which these cases are piling up and the need for nationwide clarity, the state amici cite to active litigation in 20 different federal district courts across 17 different states.
Closer to home, it should be noted that, while the Second Circuit considers a case arising from Connecticut’s efforts to enforce its gambling laws against sports prediction contracts, the ability of prediction markets to operate in the massive New York City media market is under threat.
On September 24, 2026, New York Attorney General Letitia James sued Polymarket in state court, referring to the company as “an unlicensed gambling operation.”[9] In a joint press release accompanying the lawsuit, Governor Kathy Hochul cited Polymarket’s failure to obtain proper licensing from the State Gaming Commission and vowed to “put this illegal operation to an end.”
On social media, Governor Hochul went a step further, stating: “Calling it a ‘prediction market’ doesn’t change the facts. If you’re taking bets in New York, our gambling laws apply.” Suffice it to say, the Trump administration does not agree. Who will win out in this event is a wager it seems only the Supreme Court can settle.
If you have any further questions regarding the CFTC and regulation matters, please contact Patrick J. Smith and Thomas C. White.
Citations
[1] Understanding Prediction Markets and Event Contracts. CFTC Website.
[2] Id.
[3] Id.
[4] Id.
[5] KalshiEX, LLC v. Flaherty, 172 F.4th 220 (3d Cir. 2026)
[6] KalshiEX, LLC v. Assad, No. 25-7516 (9th Cir. Aug. 28, 2026)
[7] KalshiEX LLC v. Schuler, Nos. 26-3196, 26-5235, 2026 WL 2884087 (6th Cir. Sept. 25, 2026).
[8] Brief of Amici Curiae Ohio, 38 Other States, and the District of Columbia in Support of Petitioners, Flaherty v. KalshiEX, LLC, No. 26-299 (U.S. Oct. 7, 2026).
[9] Attorney General James and Governor Hochul Announce Lawsuit Against Polymarket for Running Illegal Gambling Operation /// People of the State of New York v. QCX LLC (d/b/a Polymarket US), Index No. [unassigned], Verified Petition (Sup. Ct. N.Y. Cnty. Sept. 24, 2026).
Patrick J. Smith
Thomas C. White