The Arguments They Will Make
What Every Court, Regulator, and Lobbyist Is Saying About Prediction Markets—and What the Historical Record Actually Supports
“The law is not the private property of lawyers, nor is justice the exclusive province of judges and juries.”
— Justice Thurgood Marshall
The Kalshi Playbook
On September 12, 2024, Judge Jia Cobb of the U.S. District Court for the District of Columbia granted Kalshi’s motion for summary judgment in its challenge to the CFTC’s prohibition of election contracts. The court held that the CFTC had exceeded its statutory authority and that election contracts do not “involve” gaming under CEA Section 5c(c)(5)(C). Elections, the court reasoned, are civic processes, not games of chance like poker or slot machines.
The CFTC under Chairman Behnam appealed. The D.C. Circuit heard oral arguments on January 17, 2025. Then the administration changed. Chairman Selig took office in December 2025. In May 2025, the CFTC dropped its appeal, leaving Judge Cobb’s pro-Kalshi ruling intact. In January 2026, the CFTC withdrew the 2024 proposed rule that would have banned sports and political event contracts. It rescinded the 2025 advisory guidance urging caution on sports contracts. And Chairman Selig announced plans to draft new rulemaking supporting “responsible development” of event contract markets.
The regulatory reversal was complete. But the legal battle was just beginning — because the states had not agreed to cede jurisdiction.
The State-Federal Litigation Map
As of February 2026, Kalshi faces approximately nineteen federal lawsuits and cease-and-desist letters from multiple states. Crypto.com has received enforcement actions from Connecticut and Nevada. Polymarket, despite its new CFTC approval, faces state challenges in Tennessee and elsewhere. The total number of active state-level cases exceeds fifty.
The court rulings are irreconcilable. In Tennessee, a federal district court granted Kalshi’s preliminary injunction in February 2026, finding that sports contracts likely qualify as “swaps” under the CEA and that federal law preempts state regulation. In Massachusetts, a state court issued a preliminary injunction barring Kalshi from offering sports contracts without a state gaming license, finding that Congress did not intend to preempt state gambling authority. In Nevada, the same federal judge who granted Kalshi a preliminary injunction in April 2025 reversed himself in December, dissolving the injunction and holding that sports contracts “closely resemble” traditional sportsbook bets subject to state law.
The inconsistency is not a bug; it is the inevitable product of a legal framework that was never designed to accommodate a derivatives exchange that functions as a sportsbook. The CEA was written to regulate wheat futures, not Super Bowl props.
Argument One: Federal Preemption Under the CEA
The prediction market industry’s strongest legal argument is field preemption. The Commodity Exchange Act, as amended by Dodd-Frank, grants the CFTC exclusive jurisdiction over “transactions involving swaps or contracts of sale of a commodity for future delivery.” If event contracts are swaps — and their binary structure, cash settlement, and counterparty risk characteristics are functionally identical to certain OTC derivative instruments — then the CEA’s grant of exclusive federal jurisdiction may preempt conflicting state law.
The CFTC itself has embraced this argument. Chairman Selig’s February 2026 directive instructed the agency to file amicus briefs asserting federal authority in pending state litigation. The CFTC contends that excluding event contracts from federal jurisdiction “would reintroduce precisely the regulatory fragmentation Congress deliberately displaced” when it granted the CFTC authority over swaps in Dodd-Frank.
The problem with this argument is that Dodd-Frank itself undermines it. Section 745(b), which added CEA Section 5c(c)(5)(C), specifically authorizes the CFTC to prohibit event contracts involving gaming, war, terrorism, assassination, and activity unlawful under state or federal law. Congress would not have granted the CFTC authority to prohibit gaming-related event contracts if it believed that event contracts could never constitute gaming.
The provision is an implicit acknowledgment that the boundary between derivatives and gambling is not self-defining — and that someone must draw it.
Argument Two: Price Discovery, Informational Value, and Commercial Hedging
Prediction markets have genuine informational value.
Academic literature consistently demonstrates that well-functioning prediction markets aggregate dispersed information more efficiently than polls, expert panels, or editorial judgment. Political prediction markets, in particular, have proven more accurate than polling averages in forecasting election outcomes.
The price-discovery argument is the industry’s most intellectually honest defense.
The commercial hedging argument is related but distinct. As detailed in the preceding article, event contracts on macro-level outcomes — championship results, election outcomes, major entertainment benchmarks — do reference events to which identifiable commercial parties have genuine economic exposure. Hotels, tourism operators, media companies, defense contractors, pharmaceutical firms, energy companies, and agricultural producers all have balance-sheet items that vary meaningfully with the outcomes of elections, major sporting championships, and policy decisions.
The claim that event contracts serve “no commercial hedging function” is empirically false at the macro level, and the regulatory argument is weaker for ignoring this reality.
But both arguments have limits, and the limits track the granularity of the reference event. Price discovery for a presidential election is a public good — the information has broad social value and no existing market produces it as efficiently. Commercial hedging for an election outcome serves a genuine risk-transfer function — pharmaceutical companies and defense contractors have real exposure that existing derivatives markets do not address. At this level, the case for derivatives treatment is strong.
As the reference event descends from macro outcomes to micro statistics, both justifications attenuate. Price discovery for whether Patrick Mahomes will throw for more than 275 yards in Week 14 is not a public good — it is a consumption good, entertainment dressed as information. The licensed sportsbook market already produces this price signal with greater liquidity, tighter spreads, and more transparent methodology than any prediction market platform. And the commercial hedging justification evaporates entirely: no commercial enterprise has a balance-sheet exposure traceable to an individual player’s statistical performance in a single game.
The critical question — and the one the industry has systematically avoided — is whether the commercial hedging value that exists at the macro level requires retail participation to function.
Weather derivatives operate almost entirely between institutional counterparties, with virtually no retail participation, yet the market prices risk efficiently. If institutional counterparties with genuine opposing commercial exposures can sustain event contract markets without retail speculators, then the case for retail access must be evaluated independently, on its own consumer-protection merits, rather than as a derivative of the commercial hedging justification. The industry’s rhetorical strategy — citing the macro-level hedging function to justify micro-level retail speculation products — conflates two analytically separate questions.
The revenue data makes the disproportion impossible to ignore. In 2025, Kalshi generated $263.5 million in fee revenue. Eighty-nine percent of it — $234.6 million — came from sports contracts. Not political contracts, which generated the academic literature on prediction market accuracy. Not economic contracts, which have the strongest informational and commercial hedging justifications.
Sports.
Polymarket, which built its reputation on political prediction markets during the 2024 presidential cycle, saw sports rise from 17 percent of its volume in November 2024 to its largest category by February 2025. Robinhood traded twelve billion prediction market contracts in 2025, with sports dominating the platform’s volume. Across the industry, the contracts with the strongest informational and commercial hedging justifications — political and economic events — represent a small fraction of total activity. The contracts with the weakest justifications — sports outcomes, and specifically the player-level proposition bets that constitute the fastest-growing segment of sports wagering — represent the overwhelming majority.
This is not an incidental detail. It is the dispositive fact. The prediction market industry defends its regulatory classification by pointing to the informational value of election forecasts and the commercial hedging potential of macro-level event contracts. It builds its revenue on NFL prop bets. The intellectual justification and the commercial reality occupy different universes, and the regulatory framework must be designed for the commercial reality, not the intellectual justification.
Argument Three: The Activity-Versus-Event Distinction
The CEA prohibits event contracts that “involve” gaming. The industry argues that an event contract on a sporting event is not itself gaming — the contract references the event but does not constitute participation in the game. The distinction between “activity” and “event” is central to this argument: gaming is an activity (playing poker, spinning a roulette wheel); an event is something that happens independently of the participant’s action.
State gaming regulators reject this distinction.
Nevada’s Gaming Control Board defines any wager on a sporting event as gambling under NRS 463.0193. Massachusetts’s gaming statute covers “wagers.” The legal definitions in most states do not distinguish between participation in a game and speculation on its outcome — both are gambling. And the historical record supports the states’ position: the Life Assurance Act of 1774, which established the insurable-interest doctrine, was passed specifically because English speculators were placing bets on whether specific public figures would live or die. The distinction between “gaming” and “event speculation” has been legally contested for 250 years, and the legislatures that regulate gambling have consistently rejected it.
Argument Four: Congressional Intent and the Savings Clause
Thirty-four state attorneys general have signed briefs invoking the Supreme Court’s presumption against preemption of traditional state police powers. Their argument is textual and historical: Congress did not clearly displace state gambling authority in the CEA.
The Act’s savings clause, Section 12(e), explicitly preserves state authority over certain off-exchange activities. And the legislative history of Dodd-Frank contains no indication that Congress intended to strip states of their authority to regulate gambling — an authority they have exercised since before the Constitution was ratified.
The federal court in Maryland adopted this reasoning, denying Kalshi’s preliminary injunction and holding that Congress did not clearly intend to displace state gambling laws. The Massachusetts court reached the same conclusion. The attorneys general’s brief argues that “when Congress removes the States’ historic police powers, it does not whisper in the dark of night” — and nothing in the CEA, Dodd-Frank, or their legislative histories constitutes the kind of clear statement that would justify preemption of a regulatory domain that states have occupied for centuries.
What the Historical Record Supports
Every legal argument in the prediction markets debate has a historical analogue, and the historical analogues overwhelmingly favor state authority.
When daily fantasy sports operators argued they were offering skill-based contests, not gambling, New York’s attorney general found that one percent of players collected the vast majority of winnings — a pattern indistinguishable from a house-banked game.
The skill-versus-chance distinction was legally contested, and the states ultimately prevailed by legislating DFS into regulated frameworks.
When sweepstakes casinos argued their dual-currency model did not constitute gambling, state regulators in California, New York, and a dozen other jurisdictions disagreed, banned the model, and filed enforcement actions. The operators’ legal theory — that a promotional sweepstakes is not a casino — did not survive contact with state attorneys general.
When binary options platforms argued they were offering regulated derivatives, not gambling products, ESMA prohibited them for retail clients across the European Union. Israel banned them entirely. The CFTC itself brought enforcement actions against offshore operators. Only Nadex — the sole CFTC-regulated exchange — operated within the regulatory framework, and it shut down in December 2025.
In every case, the pattern is the same: an operator claims that its product is not gambling because of a technical classification or regulatory distinction; regulators initially tolerate the product; evidence of consumer harm accumulates; and the regulatory system ultimately reasserts the principle that if a product functions as gambling, it must be regulated as gambling, regardless of the label attached to it.
The Most Likely Outcome
The circuit split — Tennessee favoring federal preemption, Massachusetts and Maryland favoring state authority, Nevada oscillating between the two — makes Supreme Court review probable. Prediction market traders on Kalshi’s own platform place an 81 percent probability on federal preemption prevailing. But prediction market prices are not legal analysis, and the legal analysis is less favorable to the industry than its contract prices suggest.
The Supreme Court has consistently required a clear statement from Congress before finding preemption of traditional state police powers. Gambling regulation is among the most traditional of those powers. The CEA contains no express preemption of state gaming law. Dodd-Frank’s Section 745(b) specifically contemplates that event contracts may involve gaming. And the savings clause of Section 12(e) preserves state authority in terms that courts have not yet fully interpreted.
The most likely resolution is not a clean victory for either side. The Supreme Court may hold that the CEA preempts state law for some event contracts (political, economic) but not others (sports), creating a category-specific framework that neither the CFTC nor the states currently envision. Or Congress may intervene, as it did with IGRA in 1988 and PASPA in 1992, to create a new statutory framework that allocates jurisdiction between federal and state regulators.
What is least likely is the current status quo: a federal agency asserting exclusive jurisdiction over what fifty state attorneys general consider gambling, with no legislative mandate, no state tax revenue, and no consumer protection framework designed for the product being offered.