Prediction markets have been one of the fastest-growing markets in the U.S. By late 2025, monthly volumes on major U.S.-accessible platforms reached into the billions of U.S. dollars, reflecting strong retail and institutional interest.

Unlike traditional commodities or securities, binary outcome contracts (“Yes/No” event contracts) blur the lines between derivatives trading and betting, posing novel regulatory challenges that federal and state authorities are still wrestling with. In practice, U.S. prediction markets operate in a hybrid zone: federally framed as CFTC event contracts, but exposed to state gambling enforcement and ongoing litigation.

This article explains how prediction markets currently operate under U.S. law, the evolving regulatory landscape rooted in federal and state authority, how different players (particularly Kalshi and Polymarket) fit into that regime, and why the regulatory status is uncertain, fragmented, and in many respects unsustainable.

This article focuses exclusively on the United States and should be read alongside our general overview, which explains prediction market mechanics and global regulatory classification (gambling vs derivatives/event contracts), and provides a compliance checklist for prediction markets projects.

CFTC Regulation of Prediction Markets: Event Contracts Under U.S. Law

In the United States, as of the first quarter of 2026, the principal federal regulator for prediction markets is the Commodity Futures Trading Commission (CFTC). Traditionally, the CFTC’s mandate covers the oversight of swaps and futures markets under the Commodity Exchange Act (CEA). In recent years, it has extended this oversight to certain prediction markets by treating event contracts as derivatives subject to CFTC registration, reporting, and market-integrity rules.

The clearest example of this regulatory framework in action is Kalshi. KalshiEX LLC operates under CFTC registration as a Designated Contract Market (DCM) and is paired with an affiliated CFTC-registered derivatives clearing organization (DCO), enabling on-exchange clearing and settlement of event contracts. This structure allows Kalshi to function as a fully regulated derivatives venue, covering both trade execution and post-trade clearing within the federal commodities framework.

Through this federal approval, Kalshi can legally offer event contracts, including markets linked to political events, economic indicators, and other outcome-based scenarios, to U.S. residents under comprehensive CFTC supervision.

Kalshi’s vertically integrated exchange-and-clearing model illustrates how a prediction market can be brought within the U.S. derivatives regulatory perimeter: event contracts are treated as commodities or swaps, traded on a licensed exchange and cleared through a regulated clearinghouse, with mandatory disclosures, reporting, risk management, and market-integrity controls.

Polymarket’s U.S. Path: CFTC Settlement and Re-Entry via a Regulated Venue

By contrast, Polymarket exemplifies the challenges of unregulated platforms in the U.S. context. Polymarket began as a crypto-based prediction market that allowed users to wager using USDC and run markets with minimal identity verification.

In January 2022, the CFTC fined Polymarket $1.4 million and ordered it to cease offering certain trading services in the U.S. due to its failure to register as a regulated DCM and other regulatory violations. As a result, Polymarket effectively blocked U.S. users from accessing its real-money markets for several years and operated mainly offshore.

To return legally to the U.S., Polymarket pursued a strategic acquisition. In 2025 it acquired QCEX, a CFTC-licensed derivatives exchange and clearinghouse, for approximately $112 million. This move gives Polymarket a regulated U.S. entity through which it can relaunch compliant services domestically.

The Polymarket’s path highlights a key point about U.S. regulation: operating prediction markets on U.S. users without federal registration exposes platforms to enforcement actions, and compliance may require direct regulation by the CFTC or acquisition/partnership with a CFTC-regulated entity.

Federal Financial vs. State Gambling Law: Preemption and Enforcement Risk

Even where platforms secure federal CFTC oversight, the regulatory story does not end there. A major unresolved issue in the U.S. is the tension between federal authority over derivatives and state authority over wagering and gambling — a conflict that has produced contradictory court rulings, enforcement actions by gaming regulators, and lawsuits that could set long-term precedent. The flashpoint is often sports betting equivalence: state gaming regulators argue certain contracts are functionally indistinguishable from sports wagering.

State Gambling Enforcement and Sports Event Contracts

Multiple states have argued that prediction markets, especially those involving sports outcomes, are effectively unlicensed sports betting and should be regulated under state gaming laws.

State regulators in Nevada, New Jersey, Connecticut, Tennessee, Massachusetts, and others have issued cease-and-desist orders, temporary restraining orders, or lawsuits claiming that Kalshi’s contracts violate state gaming statutes.

Federal courts have been split, some have ruled that federal CFTC authority preempts state gambling laws, while others have held that states retain the right to apply their own laws.

The result is a patchwork regulatory regime where prediction markets may be permitted under federal law but effectively blocked or limited in certain states.

Class Actions and Consumer Claims

In addition to enforcement actions by regulators, prediction market operators like Kalshi are facing civil litigation.

In New York, a proposed class action alleges Kalshi engaged in “illegal deceptive activity” and unjust enrichment by operating sports-like wagers without proper state authorization and without clear disclosure of how matching and counterparties work.

In Massachusetts, the state attorney general has filed a lawsuit claiming Kalshi promoted and accepted sports wagers without complying with local gambling laws.

These lawsuits underscore how private plaintiffs and states are both using litigation as a tool to challenge prediction markets’ regulatory footing.

Why U.S. Prediction Market Regulation Remains Unsettled

The U.S. regulatory environment for prediction markets remains unstable and fragmented for several reasons:

1. Federal-State Regulatory Overlap

The fundamental conflict between CFTC jurisdiction over binary outcome contracts and state authority over gambling creates uncertainty.

Some federal courts have found that CFTC regulation preempts state law, protecting platforms like Kalshi.

Other courts and regulators have upheld state attempts to apply gaming laws, especially for sports prediction contracts.

Until there is a definitive Supreme Court ruling or new federal legislation, this split will persist, leaving operators and users uncertain about where they can legally operate.

2. Gambling vs Derivatives: Unclear Statutory Boundaries

Prediction markets resemble both financial derivatives and gambling products. The lack of a clear statutory definition for event contracts, especially on sports outcomes, deepens the uncertainty.

Platforms like Kalshi argue event contracts are financial swaps under federal law. States counter that many such contracts function like sports wagers requiring state gaming licenses.

This makes the legal status of prediction markets heavily dependent on product design and on where regulators draw the regulatory perimeter. Without coherent federal guidance, prediction markets will continue to face overlapping and sometimes contradictory enforcement regimes.

3. Policy Dependence at the CFTC and Political Sensitivity

The current U.S. framework for prediction markets seems to be policy-driven rather than statute-driven. The viability of the event-contract model depends heavily on the CFTC’s prevailing regulatory philosophy, which can shift with changes in Commission leadership and presidential administrations. While recent CFTC signals have been more supportive of prediction markets, this support is not anchored in explicit legislative guidance and could potentially be reversed without changes to the underlying law, such as by more conservative and aggressive enforcement of the “special rule for review and approval of event contracts and swaps contracts.”

This fragility is amplified by the sector’s political sensitivity. Kalshi’s and Polymarket’s appointment of Donald Trump Jr. as a strategic advisor highlights how prediction markets currently operate within a regulatory environment shaped in part by political alignment. Although lawful, this dynamic underscores that federal acceptance of prediction markets is not yet institutionally entrenched.

As a result, CFTC registration alone does not eliminate legal risk. Event-contract platforms remain exposed to policy reversals, shifting interpretations of the Commodity Exchange Act, and renewed coordination with state gambling authorities, particularly for politically sensitive markets such as elections and sports.

Conclusion: Regulation in Transition

In 2026, U.S. prediction markets sit in a legally unsettled but increasingly durable position. Federal regulation through the CFTC coexists with state gambling enforcement, litigation, and unresolved preemption questions, creating a fragmented and at times unstable framework.

At the same time, there are strong indications that prediction markets are likely to persist and grow rather than retreat. Polymarket’s planned return via a regulated acquisition, the current CFTC’s more accommodating stance, and the sector’s rising political visibility all point toward institutional entrenchment. The involvement of the President’s family in advisory and commercial roles, and Truth Social’s plans to launch its own prediction market, further suggest that prediction markets are becoming embedded in the U.S. political and media ecosystem.

The result is a regime that is commercially viable yet still legally contingent. Until there is clearer statutory guidance or definitive appellate resolution on federal preemption, prediction market operators must treat compliance as a moving perimeter rather than a one-time box-check. For founders, investors, and partners, the practical question is no longer whether prediction markets can exist in the U.S. — but how platforms will adapt their contract design, market access, and controls to remain durable through enforcement cycles, court challenges, and shifts in CFTC policy.

Final Remarks

Whether you are planning to launch a new prediction market platform or expand the functionality of an existing product, the Aurum team provides specialised legal support tailored to your business model, technical architecture and target markets.

Aurum advises prediction market teams on classification and licensing strategy (gaming vs event contracts), jurisdiction scoping and geofencing, AML/KYC and sanctions controls, market-integrity policies, and resolution governance — aligned with your actual product design and operating model. If you want a clear, actionable view of your risk perimeter, we can run a jurisdiction-and-licensing assessment and deliver a practical roadmap for launch or scale.