By: Maria Varas
Since fall 2024, when prediction markets burst onto the scene, users around the world have been embracing life’s uncertainties, investing nearly $64 billion in event contract trading that speculates on nearly everything one can imagine. Who will win March Madness? Which United States political party will take over the House of Representatives? What will be the top Netflix show of the week? Who will be the bridesmaid for Taylor Swift’s wedding?
Prediction market platforms allow participants to trade “event contracts” tied to the occurrence or non-occurrence of future events. These contracts are all-or-nothing, paying a user if the event occurs and not paying if the event does not occur. Kalshi and Polymarket are the two most notable platforms, with Kalshi reaching an $11 billion valuation and Polymarket recently signing partnership agreements with Major League Baseball and Dow Jones. On a global scale, sports event contracts account for more than 80% of prediction market activity.
However, the rapid global rise of prediction markets has drawn regulatory attention and sparked concern about insider trading. An anonymous Polymarket account created in December 2025 reportedly pocketed $400,000 for betting on former Venezuelan leader Nicolás Maduro’s capture, which allegedly occurred shortly thereafter in early January 2026. Also in December 2025, a different Polymarket user reportedly pocketed nearly $1 million for accurately betting on Google’s 2025 Year in Search list.
In the United States, “event contracts” are federally regulated by the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA). Despite the CEA not defining the term “event contract,” the CFTC maintains that the basis for its authority to regulate prediction markets stems from the CEA’s definition of “swap,” which includes “any agreement, contract, or transaction… that provides for any purchase, sale, payment, or delivery… that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.” This interpretation was reinforced by the Dodd-Frank Act, which granted the CFTC regulatory authority over swaps.
CFTC regulation of prediction markets should not be conflated with how the U.S. Securities and Exchange Commission (SEC) regulates “securities” under U.S. securities law. The line between whether an event contract is classified as a CFTC-regulated swap or an SEC-regulated security-based swap can be thin. Event contracts that pay based on a security’s change in value, or swaps tied to a security, a loan, or a narrow-based security index, are classified as “security-based swaps” and fall under SEC enforcement. Both the CFTC and the SEC have acknowledged this overlap in jurisdiction and have released a joint statement calling for agency collaboration in prediction market enforcement.
However, a recent wave of state lawsuits against Kalshi is challenging the CFTC and the federal government’s asserted exclusive authority to regulate event contracts. Various states, including Massachusetts, Maryland, Tennessee, Ohio, Connecticut, New York, New Jersey, and Nevada, argue that sports-based event contracts should be classified as gambling operations under those states’ gambling laws. Arizona has moved to pursue enforcement action against Kalshi for operating an allegedly illegal gambling business without a state license. Tribal governments in California and Wisconsin have also sued Kalshi in federal court, primarily arguing that sports-based event contracts violate the Indian Gaming Regulatory Act.
Throughout the litigation, the CFTC has continued to affirm its view that the CEA preempts state law and that the agency possesses exclusive jurisdiction over event contracts, characterizing the state lawsuits as a “power grab.” The CFTC additionally argues that the CEA’s use of the broad word “any” when defining “swap,” along with the fact that a sporting event’s result is an uncertain occurrence covered by that definition, supports exclusive jurisdiction.
States, on the other hand, assert that their traditional police power over gambling should not be displaced in this emerging worldwide prediction market. From the state governments’ point of view, buying an event contract on a sporting outcome as an “event contract” appears as a loophole for online prediction markets to avoid complying with state age-verification requirements, gambling addiction safeguards, and state gambling taxes. In addition, because of the federal government’s asserted exclusive jurisdiction over event contracts, online prediction markets are able to operate even in states where gambling is otherwise illegal.
Meanwhile, in the European Union, no unified prediction market regulation framework exists, and there is no European equivalent to the CFTC, leaving prediction market regulation to each member state’s gambling laws. As Taylor Wessing, an international law firm, explained, “the underlying events of event contracts traded on prediction markets cover a much broader spectrum that may encompass events that are not related to economics or finance… the closest alternative regulatory framework that these instruments would fall under are applicable gambling regulations.” France, Germany, Italy, and Spain classify prediction markets as gambling. Germany, in particular, prohibits prediction market platforms from allowing bets on non-sporting events such as politics or world affairs. The United Kingdom also classifies prediction markets as gambling under the U.K. Gambling Commission. Compared to the United States, where there is currently a question of whether an event contract should be regulated by the CFTC, the SEC, or a state gambling authority, European countries generally look to whether a prediction market operator is licensed under that country’s applicable gambling laws. For now, the primary question for prediction market regulation concerns the scope of permissible event contract topics.
As evidenced by Europe and the United States’ responses to the rapid rise in prediction markets, regulation is evolving in real time. Federal district courts in the U.S. are currently divided on how to allocate prediction market regulation between the federal and state governments, leading to appeals to the U.S. Courts of Appeals. Democratic Senators Richard Blumenthal and Andy Kim have introduced legislation that would target insider trading in prediction market platforms and allow for increased state oversight. The CFTC has also published an advance notice of proposed rulemaking, seeking public comment on whether to amend or issue new regulations governing prediction markets.
Ultimately, the question of how to regulate prediction markets in the United States may find its resolution in the U.S. Supreme Court, which, according to Polymarket users, has a 13% chance of granting certiorari by July 31 and a 68% chance by December 31.
