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

Introduction and Regulatory Background

Prediction markets allow participants to trade contracts whose value depends on the outcome of a future event. A typical 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 and at zero if it does not. Although prediction markets have existed for years, they entered the mainstream during the 2024 presidential election, when billions of dollars flowed into election-related contracts. Their growth accelerated dramatically in 2025 as sports replaced politics as a principal driver of trading activity. Combined 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.

That growth brought prediction markets into direct conflict with state gaming regulators. State regulators contend that these products amount to sports wagering offered without required gaming licenses; led by KalshiEX LLC (Kalshi), operators respond that they are federally regulated derivatives outside state gaming commissions’ authority. These disputes resulted in conflicting decisions with significant implications for both the prediction-market industry and the traditional state regulation of gambling.

Understanding the legal landscape requires a brief primer on the regulatory framework. Kalshi operates a designated contract market (DCM) regulated by the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA), 7 U.S.C. §§ 1 et seq. The CEA grants the CFTC “exclusive jurisdiction” over accounts, agreements, and transactions involving certain derivatives, including swaps. See 7 U.S.C. § 2(a)(1)(A). Separately, the CEA addresses event contracts based on specified occurrences or contingencies and authorizes the CFTC to restrict contracts involving, among other things, “gaming” or “activity that is unlawful under any Federal or State law.” 7 U.S.C. § 7a-2(c)(5)(C). That statutory architecture tees up the question now dividing federal courts across three jurisdictions: can state gambling laws apply to sports event contracts offered on a federally regulated exchange, or does the CEA preempt them from doing so?

The Emerging Split

New Jersey — KalshiEX LLC v. Flaherty

New Jersey was among the first states to test this 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, and 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 court 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 provides the strongest appellate authority supporting Kalshi’s preemption theory. But the Third Circuit reviewed only a preliminary injunction and therefore held only that Kalshi was likely to succeed on the merits. See id. at 232. The decision nevertheless provides a significant federal-preemption roadmap for courts confronting similar state enforcement efforts.

Nevada — KalshiEX LLC v. Hendrick

Nevada provides the cleanest counterpoint to the Third Circuit’s reasoning. 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 gambling 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 sharpen the conflict with the Third Circuit.

Utah — KalshiEX LLC v. Cox

Utah presents the newest and procedurally strongest 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

At issue in Flaherty, Hendrick, and Cox is not simply whether prediction markets “are gambling.” The harder question is who gets to decide. Kalshi argues that sports 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 gambling merely because a sports wager is packaged as a tradable contract on a federally regulated exchange.

That creates a substance-versus-regulatory-status problem. A 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 properly classified as a federally regulated “swap,” its resemblance to gambling may not answer the jurisdictional question. The emerging disagreement is over how the CEA resolves — or fails to resolve — that tension: the Third Circuit read the statute to favor federal exclusivity, while district courts in Nevada and Utah read it to preserve state regulatory authority.

Where the Field Is Heading

Prediction-market litigation is already nationwide. The three cases discussed above are only part of a much broader wave of litigation over whether sports event contracts fall within the CFTC’s exclusive jurisdiction or remain subject to state gambling laws. As of this writing, dozens of prediction-market cases are pending across the country, including proceedings in numerous federal circuits and more than 20 states. This Advisory does not attempt to catalogue that rapidly developing body of litigation, but its breadth underscores that courts nationwide are now confronting the same fundamental regulatory conflict.

More appellate guidance is coming. The Third Circuit’s Flaherty decision favors federal preemption, the Ninth Circuit heard argument in Hendrick, and Kalshi 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 conflicting authority — on the scope of federal preemption.

The CFTC is increasingly defending its turf. The commission intervened or filed amicus briefs in multiple proceedings, arguing that state gaming regulators are intruding on exclusive federal jurisdiction over DCM-listed contracts. Its participation makes clear that these disputes are no longer only between individual prediction-market operators and state regulators.

The ultimate rule may not be all-or-nothing. Courts could distinguish among particular types of event contracts or among different forms of state regulation, including outright prohibition, licensing, and consumer-protection requirements, rather than adopting a single rule for every sports-related prediction market.

Congress may ultimately need to clarify the boundary. 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). The current litigation exposes an overlap between federal derivatives law and state gambling 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 prediction markets operate under a uniform federal framework or must contend with a patchwork of state-by-state gambling restrictions. 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.