Prediction Markets at a Crossroads: Congress, Courts, or Chaos?

Introduction and Regulatory Background

Prediction markets are exchange platforms that allow participants to trade event contracts whose value depends on the outcome of a future event. A typical event contract poses a yes-or-no question — such as whether a particular candidate will win an election, the Federal Reserve will cut interest rates, or a team will win a sporting event — and settles at a fixed value if the specified event occurs or at zero if it does not. Although prediction markets have existed for decades, they entered the public mainstream during the 2024 presidential election, when billions of dollars flowed into retail-facing, election-related, event contracts. The growth of event contracts accelerated dramatically in 2025 as sports replaced politics as a principal driver of trading activity. Combined global trading volume on leading platforms Kalshi and Polymarket reportedly exceeded $40 billion in 2025, compared with roughly $9 billion in 2024, and continued climbing in 2026. Sports are central to that expansion: since July 2024, sports contracts accounted for approximately 80% of Kalshi’s trading volume and 39% of Polymarket’s.¹

That growth has brought prediction markets into direct conflict with state gaming regulators. State regulators contend that some event contracts offered by prediction market platforms amount to sports wagering subject to state gaming laws and licensing requirements. Kalshi and other platform operators respond that these event contracts are federally regulated derivatives outside the authority of state gaming commissions. As of the date of this Advisory, courts have issued conflicting decisions on these issues with significant implications for both the prediction-market industry and the traditional state regulation of gaming.

Understanding the legal landscape requires a brief primer on the regulatory framework. Although not specifically defined under the Commodity Exchange Act (CEA), event contracts historically have been treated as swaps or futures contracts. As such, markets that offered event contracts for public trading were required to register with the Commodity Futures Trading Commission (CFTC) as a designated contract market (DCM). The CEA grants the CFTC exclusive regulatory and enforcement jurisdiction over transactions involving swaps and futures contracts traded on registered DCMs. See 7 U.S.C. § 2(a)(1)(A). The CEA also grants the CFTC the authority to evaluate and determine whether event contracts offered by DCMs are contrary to the public interest because they involve, among other things, “gaming” or “activity that is unlawful under any Federal or State law.” 7 U.S.C. § 7a-2(c)(5)(C). Historically, the CFTC expressed skepticism about whether some sports-related event contracts serve a legitimate economic purpose, but had not categorically prohibited them.

This statutory architecture, coupled with the significant growth in public interest, has teed up a question now dividing federal and state courts across several jurisdictions about the legality and regulatory oversight of sports-related event contracts: do state gaming laws apply to sports-related event contracts offered on a federally regulated exchange, or does the CEA preempt their application?

Dozens of prediction-market cases are now pending across the country in numerous federal circuits and more than 20 states. These cases involve several types of litigants with vested interest in the oversight of sports-related event contracts, including state gaming regulators and attorneys general, prediction-market platforms, tribal gaming authorities, the CFTC, and the Department of Justice. This Advisory does not attempt to catalogue the broad and rapidly developing body of litigation. Rather, it focuses on three cases that illustrate the growing split among courts and the differing approaches courts have taken on the interaction between the CEA and state gaming laws.

In each of the cases below, Kalshi argues that sports-related event contracts fall within the CEA’s derivatives framework and, when traded on a DCM, within the CFTC’s exclusive jurisdiction. State authorities respond that Congress did not eliminate their traditional power to regulate gaming merely because a sports wager is packaged as a tradable contract on a federally regulated exchange.

Each case demonstrates that the dispute across the broader prediction-market litigation landscape is not solely whether sports-related event contracts constitute gaming under state law. The cases turn on threshold questions under the CEA: whether these sports-related event contracts are ‘swaps’ and, if so, whether the CEA’s grant of exclusive jurisdiction to the CFTC preempts state laws that would otherwise regulate or prohibit those contracts. 

The Emerging Split

New Jersey — KalshiEX LLC v. Flaherty

New Jersey was among the first states to test the preemption question. The New Jersey Division of Gaming Enforcement informed Kalshi that its sports event contracts constituted sports wagering requiring a state license. Kalshi sued in federal court, arguing that the CEA preempted New Jersey’s regulation. The district court granted a preliminary injunction. In April 2026, the U.S. Court of Appeals for the Third Circuit affirmed. KalshiEX LLC v. Flaherty, 172 F.4th 220, 232 (3d Cir. 2026). The Third Circuit agreed with the district court that Kalshi demonstrated a reasonable likelihood of success in showing that its sports event contracts qualify as “swaps” traded on a CFTC-licensed DCM and therefore fall within the CFTC’s exclusive jurisdiction. Id. at 228-29. It also emphasized that Congress expressly contemplated event contracts involving “gaming” and gave the CFTC authority to review and prohibit such contracts. Id. at 231. Further, the court reasoned that Congress’ decision to include gaming within the CEA’s event-contract framework — rather than excluding gaming-related contracts from federal oversight — demonstrated an intent to keep those contracts within the CFTC’s regulatory ambit, subject to whatever restrictions the commission might impose. Id. at 227.

Despite a divided panel, the majority’s reasoning in Flaherty is the strongest appellate authority to date supporting Kalshi’s preemption theory. But that guidance is limited: the Third Circuit reviewed only the propriety of a preliminary injunction, and its decision, while it addresses Kalshi’s likelihood of success on the merits in that context, cannot be read as a decision on any dispositive motion. See id. at 232. The decision nevertheless provides a significant roadmap for future cases.

Nevada — KalshiEX LLC v. Hendrick

Faced with the same basic preemption question, the Nevada district court reached the opposite conclusion. After the Nevada Gaming Control Board sent Kalshi a cease-and-desist letter stating that it was operating an “unlicensed sports pool in violation of Nevada gaming law,” Kalshi filed a federal preemption challenge. KalshiEX LLC v. Hendrick, 817 F. Supp. 3d 1014, 1021 (D. Nev. 2025). The district court initially granted Kalshi a preliminary injunction, reasoning that the CFTC had exclusive jurisdiction over contracts listed on a DCM and that Nevada gaming law was preempted. Id. But in November 2025, after considering intervening rulings in other cases, the court dissolved the injunction. Id. at 1021-22.

In reversing course, the district court emphasized states’ traditional authority to regulate gaming and concluded that Kalshi’s sports contracts were, “at bottom,” sports wagers. Hendrick, 817 F. Supp. 3d at 1029. It rejected Kalshi’s broad interpretation of “swaps,” reasoning that it could “sweep nearly all sports wagering into the CFTC’s exclusive jurisdiction” and would extend the CEA far beyond the financial products Congress targeted when it expanded federal swaps regulation after the 2007-2008 financial crisis. Id. at 1030-31. Nevada has also pursued state-law enforcement against Kalshi, making the jurisdiction a particularly vivid example of the collision between federal derivatives regulation and state gaming authority. The Ninth Circuit heard argument in April 2026, and its forthcoming decision could create a circuit split with the Third Circuit or bring the two circuits into alignment.

Utah — KalshiEX LLC v. Cox

The district court in Utah issued the most recent ruling favoring state authority. Kalshi challenged Utah’s ability to enforce its anti-gambling statutes against sports event contracts, raising substantially the same federal-preemption theory it advanced in New Jersey and Nevada. In August 2026, however, the U.S. District Court for the District of Utah granted the state’s motion for summary judgment and rejected Kalshi’s preemption claim on the merits. KalshiEX LLC v. Cox, 2026 WL 2241564, at *1 (D. Utah Aug. 4, 2026).

The court acknowledged that the CEA gives the CFTC exclusive jurisdiction over swaps traded on DCMs, but concluded that the statute does not displace state gambling regulation. Cox, 2026 WL 2241564, at *7-8. In particular, the court read the CEA’s jurisdictional and preemption provisions as leaving room for state law and concluded that “enforcement of State gambling laws is not inconsistent with the CFTC’s regulation and oversight of derivatives markets.” Id. at *13.

Cox is significant not only for its substantive holding but also for its posture. Unlike the New Jersey and Nevada district court rulings, which arose at the preliminary-injunction stage, Cox resolved the preemption issue on summary judgment. Kalshi appealed the following day, creating another vehicle for appellate consideration of the disagreement reflected in Flaherty, Hendrick, and Cox.

What the Litigation Is Really About

The competing characterizations of sports-related event contracts across the litigation landscape have created a tension between the economic substance and the legal classification of these contracts. An event contract that pays based on whether the Dallas Cowboys beat the Philadelphia Eagles may look economically indistinguishable from a sportsbook wager on the same game. But if the contract is classified as a federally regulated “swap,” its legal classification may bear on whether, and to what extent, the CEA preempts the application of state gaming laws. The emerging disagreement among courts is, therefore, not merely about how these event contracts operate, but the legal consequence of a swap classification under the CEA. In the Kalshi cases, the Third Circuit read the statute to favor federal exclusivity, while district courts in Nevada and Utah determined the statute did not displace state regulatory authority.

Where the Field Is Heading

More appellate guidance is coming. The Third Circuit’s Flaherty decision favors federal preemption; the Ninth Circuit has heard argument in Hendrick; and Kalshi has appealed Cox to the Tenth Circuit. New Jersey, meanwhile, obtained an extension through September 4, 2026, to seek Supreme Court review of Flaherty. Other appellate proceedings are also underway, including an expedited Sixth Circuit appeal arising from Ohio. The next several months could therefore produce significant appellate guidance — and potentially a circuit split that may ultimately require resolution by the U.S. Supreme Court. 

The CFTC is increasingly defending its turf. The CFTC has filed amicus briefs or intervened in multiple proceedings, and, in some instances, filed its own actions together with the DOJ against several states seeking to enjoin enforcement of state gaming laws against CFTC-registered DCMs. The CFTC has argued that state gaming regulators are intruding on exclusive federal jurisdiction granted by the CEA over DCM-listed contracts. Its participation, along with the DOJ on behalf of the U.S. government, makes clear that these disputes are no longer only between individual prediction-market operators and state regulators. Moreover, in June 2026, the CFTC put forward proposed amendments to its event-contract regulations to clarify the federal framework for prediction markets, while separately maintaining that the CEA grants it exclusive jurisdiction.

Congress may ultimately need to clarify the boundary. Congressional interest in prediction markets has increased, but Congress has not yet proposed a framework with a solution. While a proposed bill has circulated that would prohibit CFTC-registered entities from listing contracts that resemble sports wagers or casino-style games, broader proposed measures have emerged over concerns about event contracts that involve war, terrorism, and assassination. The wide breadth of concerns over event contracts, including trading on nonpublic information, may result in Congress addressing sports-related event contracts as part of a broader framework addressing a booming area of public interest. In the meantime, it may be that the CFTC’s proposed regulations provide some of this clarity.

As the Supreme Court observed in Murphy v. NCAA, Congress may regulate sports gambling directly, but absent federal regulation, states remain free to act on their own. 584 U.S. 453, 486-87 (2018). Although Murphy was not a CEA case, the current litigation exposes an unresolved boundary between federal derivatives law and state and tribal gaming regimes that were not designed with today’s retail sports prediction markets in mind.

Conclusion

The expansion of prediction markets into sports has transformed what was once largely a derivatives-regulation question into a significant federalism and gaming-law dispute with national implications. Flaherty, Hendrick, and Cox illustrate sharply divergent judicial approaches to the same fundamental question, and the next round of appellate decisions may determine whether sports-focused prediction markets operate under a uniform federal framework or must contend with a patchwork of state-by-state gaming restrictions.

For companies operating in, or considering entry into, the event contracts and prediction markets space, the legal landscape remains unsettled. Until the preemption issue is resolved through further appellate guidance, agency action, or legislation, companies should closely monitor developments and evaluate the federal, state, and, where applicable, tribal-law requirements that may apply to their particular products, activities, and jurisdictions. Federal registration or compliance with one regulatory regime may not, by itself, resolve all potential obligations. Companies should therefore assess the need for appropriate licensing, product restrictions, consumer-protection controls, and related compliance measures.

Arnold & Porter attorneys are closely monitoring these cases and the rapidly developing prediction-market landscape. Clients with questions regarding these developments or their potential implications should contact the authors or their regular Arnold & Porter contacts.

© Arnold & Porter Kaye Scholer LLP 2026 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.