What Are Prediction Markets & Sports Event Contracts?

Prediction markets allow users to buy or sell “yes/no” or other outcome‐based contracts on events such as elections, financial indicators, or sports results. For example, a user might buy a contract that pays out if a specific team wins a championship. These contracts are often framed as financial derivatives (or event contracts) rather than traditional wagers, and this framing lies at the core of many of the legal debates. Platforms like Kalshi and Polymarket have sought regulatory clarity under federal law, particularly via the Commodity Futures Trading Commission 

Legal & Regulatory Frameworks in the U.S.

Federal Level: CFTC, UIGEA, and Other Federal Statutes

The CFTC regulates derivatives under the Commodity Exchange Act (CEA). Prediction market operators argue that sports event contracts can be regulated under the CEA rather than under state gambling laws. Some platforms have tried to self‐certify or seek rulings or no‑action letters from the CFTC.

Meanwhile, there are also other federal statutes that can come into play. For example, the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 regulates financial transactions related to online gambling, and states have various gambling laws that define what constitutes a wager or sports betting. These laws—both state and federal—define the legal landscape into which prediction markets must fit.

State Laws & Cease‑and‑Desist Letters

States regulate gambling under their own statutes. Many states have legalized sports betting to some degree since the 2018 Supreme Court decision in Murphy v. NCAA, which struck down PASPA (Professional and Amateur Sports Protection Act). But state laws vary widely in what they permit, how licensing is handled, and what kinds of bets or contracts are allowed.

Several states, including Nevada, New Jersey, Maryland, Ohio, Illinois, and Montana, have issued cease‐and‐desist orders to prediction market operators like Kalshi (and those offering through platforms like Robinhood) where sports event contracts are deemed to violate state gambling statutes. In some cases, preliminary injunctions have allowed continued operation pending litigation, as courts weigh the federal vs state authority question.

Recent Key Developments

• Kalshi’s Legal Battles: Kalshi has been sued or challenged by state regulators over sports event contracts. In New Jersey and Nevada, preliminary injunctions have permitted continued operations while litigation proceeds.
• Polymarket’s U.S. Return: Polymarket, which previously blocked U.S. users due to regulatory concerns, has now secured approvals to return to the U.S., leveraging a CFTC‐licensed derivatives exchange (QCEX) and obtaining certain no‑action relief.
• Robinhood & Sports Contracts: Robinhood launched a prediction markets hub that offers sports event contracts via Kalshi. This expansion has drawn attention (and legal scrutiny) from state gaming regulators.
• Regulatory Uncertainty: The CFTC’s plans to conduct public forums and clarify its stance on sports event contracts have had fits and starts. At least one roundtable was canceled, leaving many questions unanswered.

Major Legal Issues & Contentions

Are Prediction Markets Gambling or Financial Derivatives?

This is perhaps the central question: whether a sports event contract in a prediction market is legally a “wager” (gambling) or a regulated financial instrument (derivative/futures). If it’s gambling, then state gaming laws apply. If it’s a derivative, then federal regulation under the CFTC may apply. The outcome has major implications for licensing, taxation, consumer protection, integrity of competitions, etc.

State vs Federal Jurisdiction & Federalism

State regulators argue that allowing sports event contracts without a sports betting license undermines state revenue, regulation, and oversight (such as age verification, anti‑gambling obligations, responsible gaming, etc.). On the flip side, prediction market operators rely on federal authorities (CFTC) claiming that their activities are covered by federal law and should pre‑empt conflicting state laws. Courts are beginning to weigh in.

Consumer Protection & Market Integrity

Concerns include fraud, market manipulation, transparency, fairness, recordkeeping, protection of minors, misleading disclosures, and responsible gaming. These are issues that state gambling commissions typically regulate; prediction markets may not have all the same infrastructure in place.

Taxation, Liability & Enforcement

If these contracts are treated as gambling, operators may face state gaming taxes, licensing fees, and more regulation. If treated as derivatives, then different tax and regulatory regimes apply. Additionally, enforcement actions vary: some states issue cease and desist orders, others pursue injunctions. Legal liability in states violating their laws is real.

What This Means for Platforms & Users

• Platforms (Kalshi, Polymarket, Robinhood, etc.) will need to manage regulatory risk, possibly obtain licenses in certain states, design compliance with both federal and state rules, build in consumer protection and know‑your‑customer (KYC) and anti‑fraud measures, and prepare for litigation. Many already are doing so.
• Users / Traders should be aware that although some offerings are legal under federal law or court order, state laws might still target them in certain jurisdictions. Users may face risk if state law is enforced, including penalties or blocked access. Also, taxation of gains and losses may differ depending on whether something is considered gambling or trading.
• State Regulators & Legislatures are under pressure to clarify statutes, decide whether to bring enforcement actions, issue guidance, and possibly update laws to account for modern prediction markets.
• Investors & Institutional Backers will closely watch which platforms survive regulatory challenges; regulatory clarity will affect valuations and business models. Some may prefer companies that secure regulated exchange status or that limit contracts types.

Case Studies & Court Decisions

Here are a few ongoing or completed cases / decisions that illustrate how the law is evolving:

• Kals hi in New Jersey & Nevada vs State Regulators: Kalshi won preliminary injunctions in some states allowing its sports event contracts to continue while litigation proceeds. In other states, regulators have been more aggressive in enforcing gambling statutes.
• Polymarket’s Regulatory Settlement and Return: After paying fines in earlier enforcement actions, Polymarket acquired QCEX (a CFTC‑licensed derivatives exchange) to re‑enter the U.S. market with greater regulatory legitimacy.
• Robinhood’s Collaboration with Kalshi: Robinhood’s prediction market hub (powered by Kalshi) shows how mainstream finance/fintech companies are entering the prediction market space, which increases both opportunity and regulatory exposure.

Outlook & Potential Future Scenarios

Given how fast things are moving, several scenarios are plausible over the next few years. These are not predictions, but what legal analysts see as likely paths.

1. Federal Preemption or Clarification via CFTC Rules: The CFTC might issue clearer rules or new regulations clarifying whether sports event contracts are derivatives or financial instruments, thus limiting the ability of state gambling regulators to enforce against these platforms. Congress could also weigh in if courts leave open gaps.
2. State Law Adjustments: Some states may update their law (or court decisions) to include event contracts explicitly, either to license them, ban them, or regulate them under sports betting laws. Others may decide these contracts are gambling and enforce existing laws strictly.
3. Litigation & Appeals Leading to Precedents: More court decisions are likely—especially appellate decisions—that will clarify ambiguous statutory language (like what counts as a wager vs a derivative), how to treat interstate operations, and how prediction market platforms should structure their businesses.
4. Compliance & Industry Best Practices Evolution: Platforms may adopt compliance frameworks (age verification, responsible gaming, disclosures, self‐regulation, transparency around odds, consumer protections) to reduce risk. Those with strong legal backing may gain market advantage.
5. Possible Legislative Action: Congress might consider federal legislation to regulate or limit certain kinds of prediction markets, especially around sports, to ensure uniformity, protect consumers, ensure state tax revenue, and avoid regulatory arbitrage.

Conclusion

Prediction markets represent a fascinating and rapidly evolving intersection between finance, gaming, technology, and regulation. Platforms like Kalshi and Polymarket are testing whether sports event contracts can be treated under the same regulatory regime as financial derivatives rather than being governed solely by state gambling laws. The outcomes of lawsuits, regulatory guidance, and state enforcement actions in 2025 and beyond will determine how wide the gap remains between regulation and innovation.

For platforms, the stakes are high: opportunity vs legal risk. For users, there is both promise (new ways to engage with sports or events) and uncertainty (regulation, taxes, legal status). As this space develops, staying updated with both state and federal rules—and using regulated platforms—will be crucial.

For more analysis, see our posts on State vs Federal Gambling Laws, Derivatives & Financial Regulation, and Consumer Rights in Online Gambling & Betting.