Who Should Regulate Prediction Markets?

Overview

Prediction markets let people buy and sell contracts tied to the outcome of an event. A contract may pay $1 if an event happens and nothing if it does not. The market price is often read as an estimate of the event’s probability, although prices can also reflect trading limits, liquidity and who chooses to participate.

The Commodity Futures Trading Commission, or CFTC, is considering a major rule for these markets. Its June 2026 proposal would clarify which event contracts can trade on federally regulated exchanges and which contracts should be blocked as gaming or contrary to the public interest. The public comment period ended on July 27.

The proposal arrives during a larger legal fight. The CFTC says registered exchanges are part of a national derivatives market that needs uniform federal rules. State regulators, gaming associations and some tribal governments argue that many sports and other event contracts are gambling products that must follow state and tribal laws.

This debate is not simply about whether prediction markets should exist. It is about what they are, who should regulate them and which consumer protections should apply.

What the Proposed Rule Would Do

The Commodity Exchange Act gives the CFTC special authority to review event contracts involving unlawful activity, terrorism, assassination, war, gaming and similar activity. The proposal would define key words, create a more structured public-interest review and generally give the agency 90 days to act on a self-certified contract.

The proposal distinguishes the outcome of a contest from conduct that occurs while a contest is being played. It would generally allow contracts tied to the result or score of many professional and college sports contests while treating contracts about injuries, fights, officiating or pre-collegiate sports as prohibited gaming. It would also leave many election, awards and economic event contracts eligible for federal review.

No final rule has been adopted. Courts are also considering whether federal commodities law overrides state gambling laws for contracts listed on CFTC-regulated exchanges.

Perspective One: Use One Federal Market Framework

1. A national market needs national rules

Claim: Supporters say a federally regulated exchange cannot operate efficiently if each state can impose a different list of permitted contracts.

Fact-check: The CFTC does have exclusive federal jurisdiction over many transactions classified as swaps or futures. In July, the agency said uniform access was important when it stayed a Kalshi rule change affecting Michigan traders. However, the scope of federal preemption for sports event contracts remains disputed in several court cases.

Counterargument: National consistency is useful only if Congress placed the product within federal derivatives law. States argue that calling a wager a contract does not automatically remove their traditional authority over gambling.

2. Event contracts can produce useful information

Claim: Prediction-market supporters say prices combine the knowledge of many traders and can improve forecasts.

Fact-check: Markets can aggregate information, and the CFTC proposal recognizes price discovery as a possible public benefit. A market price is not a scientific probability, however. Thin trading, participation limits, manipulation attempts and unequal information can make the price less reliable.

Counterargument: Useful information does not decide how a product should be regulated. Sportsbooks also generate odds that communicate expectations, but states still regulate them as gambling.

3. Some contracts can help people manage real risk

Claim: Supporters say event contracts are not only entertainment because businesses and individuals can use them to hedge risk.

Fact-check: That is possible. A company exposed to weather, elections or government policy could use a contract to offset part of a loss. The CFTC proposal discusses hedging as a potential benefit. Still, many retail sports trades have no clear connection to a trader’s existing financial risk.

Counterargument: Regulators could permit contracts with a demonstrated economic purpose while applying different rules to products used mainly for recreation.

4. Exchanges do not set odds in the same way as a sportsbook

Claim: Platforms say their users trade with one another, while the exchange matches orders and collects fees.

Fact-check: That describes the basic exchange model. A traditional sportsbook usually acts as the counterparty and adjusts its odds. The distinction is real, but both products can give a customer nearly identical financial exposure to a team winning or losing.

Counterargument: Consumer-protection rules should focus on what users experience, not only on the technology used to match the transaction.

5. The CFTC already has tools against fraud and manipulation

Claim: Federal-regulation supporters say prediction markets are not an unregulated space.

Fact-check: Correct for registered exchanges. Federal prohibitions cover fraud, manipulation, wash sales, disruptive trading and some uses of material nonpublic information. In 2026, the CFTC publicized prediction-market cases involving alleged insider trading and fraud. Those cases show enforcement authority exists, not that every violation will be detected.

Counterargument: State gaming systems also impose licensing, age, advertising and responsible-gambling rules that federal commodities regulation may not duplicate.

6. Federal oversight can set one standard for market integrity

Claim: Supporters argue that common rules for surveillance, customer funds and contract settlement make markets safer.

Fact-check: CFTC-regulated exchanges and clearing organizations must follow federal requirements, and event contracts are subject to exchange rules. The proposed rule would make contract review more predictable. It does not by itself answer every concern about addiction, advertising or the minimum age for sports-related trading.

Counterargument: A combined approach could preserve federal market-integrity oversight while allowing minimum state consumer protections that do not block interstate trading.

7. Clear definitions are better than enforcement by uncertainty

Claim: Industry supporters say exchanges need to know in advance which contracts count as gaming.

Fact-check: The current dispute has produced inconsistent court orders and state enforcement actions. The proposal would clarify terms and establish a review schedule. Definitions can reduce uncertainty, but a final agency rule could still be challenged as exceeding the statute.

Counterargument: Clarity does not cure a rule that assigns authority to the wrong regulator. Congress could settle the issue more directly through legislation.

8. Driving trading offshore may reduce oversight

Claim: Supporters warn that broad U.S. bans would send traders to foreign or decentralized platforms with fewer protections.

Fact-check: Offshore prediction markets are accessible to some U.S. users despite restrictions, so displacement is a plausible risk. The size of that effect is uncertain. It does not follow that every product must be approved domestically.

Counterargument: The possibility of illegal or offshore activity has not stopped governments from limiting other high-risk products. Enforcement and carefully designed legal alternatives can operate together.

Perspective Two: Preserve State and Tribal Gambling Authority

1. Sports event contracts function like bets

Claim: Critics say a contract paying on which team wins is sports gambling, even if it trades on an exchange.

Fact-check: Economically, a yes-or-no sports contract can closely resemble a sportsbook wager. The legal classification is less settled. A federal judge temporarily blocked Arizona enforcement against Kalshi after finding that the company was likely to show its contracts are federally regulated swaps, but that preliminary ruling was not a final nationwide decision.

Counterargument: Legal categories often depend on market structure and statutory language, not only on whether two products create similar gains and losses.

2. Congress did not clearly create a national gambling regulator

Claim: Former Senator Chris Dodd, a co-sponsor of the Dodd-Frank law, says Congress did not intend the CFTC to become a national gaming commission.

Fact-check: Dodd has made that argument, and former CFTC chair Timothy Massad has raised similar concerns. Their views are relevant to legislative history but do not control the statute’s meaning. The law expressly tells the CFTC to examine certain event contracts involving gaming.

Counterargument: Supporters say Congress gave the CFTC both exclusive derivatives jurisdiction and specific event-contract authority, even if prediction markets later grew in unexpected ways.

3. States have long regulated gambling

Claim: State officials say they have the experience and constitutional police powers to license gambling and protect residents.

Fact-check: States have traditionally set most rules for commercial gambling, including sports betting after the Supreme Court’s 2018 decision ending the federal ban on state-authorized sports wagering. Federal law still governs commodities markets, interstate commerce and tribal gaming. The central question is which body of law applies to these contracts.

Counterargument: Historical state authority cannot override an express federal statute. If event contracts are swaps, conflicting state rules may be preempted.

4. State gaming rules include protections designed for bettors

Claim: Critics say state systems more directly address problem gambling, age limits, advertising and self-exclusion.

Fact-check: Many state sports-betting laws include those protections, although standards and enforcement vary. CFTC rules focus mainly on fair derivatives markets and financial integrity. Some prediction platforms have added identity checks and responsible-trading tools, but these are not identical to a single nationwide gaming code.

Counterargument: Patchwork state protections can be inconsistent. The CFTC or Congress could establish stronger national safeguards for retail event-contract traders.

5. Tribal governments could lose authority and revenue

Claim: Tribal critics say federally approved sports contracts can bypass gaming compacts and weaken tribal economic rights.

Fact-check: Tribal gaming is governed by the Indian Gaming Regulatory Act, tribal sovereignty and state compacts. If exchange contracts are legally classified as derivatives rather than gaming on Indian lands, they may fall outside that framework. The financial effect will depend on customer substitution and final court rulings.

Counterargument: No business has a guaranteed right to be protected from competition. Still, Congress has special legal obligations toward tribes that deserve explicit consideration.

6. Insider information creates special risks

Claim: Critics warn that athletes, referees, campaign staff and government employees may trade on information the public does not have.

Fact-check: The risk is real. CFTC enforcement actions in 2026 included allegations involving nonpublic information. Exchange rules can prohibit certain insiders, but identifying every connected person is difficult. The same risk does not prove that all event contracts are manipulated.

Counterargument: A transparent regulated exchange may detect suspicious trading more effectively than informal or offshore markets.

7. The public-interest test may be too permissive

Claim: Opponents say the proposal could normalize betting on sensitive public events and social harms.

Fact-check: The proposal would continue to prohibit or closely review specified categories such as assassination, terrorism, war, unlawful activity and gaming. It also proposes public-interest factors. Reasonable people can disagree about whether those lines protect dignity and safety well enough.

Counterargument: A broad moral standard can become unpredictable or political. Specific, evidence-based limits are easier for courts, exchanges and customers to understand.

8. The CFTC may not have enough capacity for a retail betting market

Claim: Critics say a derivatives regulator built around financial markets lacks the staffing and mission to supervise millions of sports-related retail trades.

Fact-check: Prediction-market volume has grown quickly, while the CFTC remains much smaller than many financial regulators. The proposal itself reports that event-contract notional value was still a small fraction of conventional futures markets in March 2026. Volume alone does not measure consumer harm or enforcement workload.

Counterargument: Specialized staff, exchange self-regulation and fees could expand capacity. The agency’s experience with surveillance and market manipulation is directly relevant.

Where the Debate Stands

The public-comment deadline has passed, but the rule is not final. The CFTC can revise the proposal, adopt it, withdraw it or take no immediate action. There is no announced deadline for a final vote.

Meanwhile, federal courts are considering challenges involving Arizona, Michigan and other states. Different courts may reach different answers before an appeals court or the Supreme Court provides a broader rule. Congress could also amend the Commodity Exchange Act to state more clearly which event contracts belong under federal commodities law and which remain subject to state or tribal gaming rules.

The most practical policy question may be whether one label must control everything. Market integrity, consumer protection, tribal rights and nationwide access could be divided among regulators. That approach would require clear boundaries so platforms and customers know which rules apply.

Discussion Questions

What is the strongest reason to treat a sports event contract as a derivative?
What is the strongest reason to treat it as gambling?
Which regulator is best prepared to address insider information?
Should the same minimum age apply to prediction markets and sportsbooks?
How much weight should courts give to the economic similarity between two products?
Which consumer protection should every prediction platform be required to provide?
How should tribal sovereignty affect a national prediction-market policy?
Can a market provide useful information and still create unacceptable social risks?
Should Congress write a new law, or should courts and the CFTC interpret the current one?
Imagine your state bans a sports contract that a federal exchange lists. Which rule should control, and why?

Prediction Markets or Gambling? The Fight Over Who Regulates Them