A regulatory loophole could mean the end of the state licensing system that presently governs gambling in the United States. Prediction markets register with the Commodity Futures Trading Commission (CFTC) as derivative exchanges. This means that they can argue they’re offering financial instruments rather than wagers.
Federal versus state regulation
CFTC-regulated exchanges operate under federal jurisdiction. Unlike US online gambling platforms, they don’t need licenses from state gambling boards and don’t have to pay state taxes. Prediction markets permit participation at age 18, whereas most states only allow participation in online gambling from the age of 21.
Operating mechanisms
In casinos, the house sets the prices and carries the risks. Most sportsbooks have 10% vigorish embedded in their odds.
In prediction markets, the users determine the prices and share the risks. They trade against each other and not against the house. The platform makes its money from transaction fees, and users can sell their positions at any time.
Political backing for prediction markets
In September 2024, a DC Circuit Court ruled that Kalshi’s election contracts were different from ‘gaming’ because elections aren’t games. The CFTC has since dropped any investigations under the Trump administration.
Donald Trump Jr. advises Kalshi and Polymarket, and Trump Media has its own prediction market platform. A former Kalshi board member was nominated to lead the CFTC. When Caroline Pham was acting chair, she stated that prediction markets are an important new frontier. As of February 2026, Michael Selig is head of the CFTC, and he was nominated by President Trump.
States launch challenges
The AGA estimates that states have lost $142 million in tax revenue since prediction markets started offering sports contracts.
The core issue for states is that licensed gaming companies invest millions to comply with state regulations. Now, prediction markets can offer the same products without needing licenses or paying taxes. For example, Kalshi is now offering sports parlays. Some states and tribal gaming authorities have launched legal challenges, but courts have come to contradictory conclusions.
The Supreme Court could end up deciding whether federal CFTC registration preempts state gambling laws. This could influence the way gambling in the U.S. is structured in the future.
Sports contracts
Those following trends on Instagram will know that Polymarket was on everyone’s lips when it started offering election betting. Now, sports contracts are making prediction platforms wealthy. Most of Kalshi’s volume in September 2025 came from sports contracts. It offers everything from NFL moneylines to player props in the form of sports contracts.
From October 2025, the NFL began to partner with prediction markets, which gave them legitimacy. Now, even some major financial institutions are treating prediction platforms as legitimate.
‘Illegal sports betting’ or an opportunity to transform
The American Gaming Association (AGA) called prediction markets ‘illegal sports betting.’ However, when it wanted to exclude operators offering prediction markets, both FanDuel and DraftKings walked out. Both companies are now launching their own prediction market platforms. They plan to target states without legal sports betting. Both have chosen to see prediction platforms as an opportunity to transform rather than as a threat.
Sweepstakes casinos also found a regulatory loophole to begin operating and have been facing a crackdown in many states. The difference between them and prediction markets is that they don’t have federal protection.
The current ambiguity regarding prediction markets is likely to continue for some time. This could mean that in the not-too-distant future, several well-capitalized platforms could be operating under a hybrid federal-state framework.
Niche financial products or mainstream alternatives
Will prediction markets remain niche financial products, or will they become mainstream alternatives to gambling? Polymarket has a blockchain foundation that makes it harder to regulate and trust. Kalshi uses a more traditional structure, so it’s easier to regulate.
On blockchain, users control their funds through wallets, and each transaction is publicly verifiable. This offers a level of transparency that traditional sportsbooks can’t compete with. However, with the trends in prediction market platforms towards using blockchain for transparency, certain risks come with this that regulated platforms seek to avoid.
Disclaimer:
This article is published for informational purposes only. It does not constitute legal, financial, or gambling advice, nor does this website promote or facilitate betting activities. Readers are responsible for complying with the laws and regulations in their respective jurisdictions. Participation in gambling or prediction markets involves financial risk.