Where Regulation Ends and Betting Begins
Prediction markets occupy a legal and philosophical grey zone—straddling the line between legitimate financial instruments and regulated gambling. At their core, these markets allow users to buy and sell contracts based on the outcomes of real-world events, from political elections to sports games.
But whether these contracts represent skilled financial speculation or chance-based wagering depends on which side of the regulatory aisle one stands—and where.
⚖️ Legal Definitions: Commodity Futures or Wagers?
The distinction between a regulated prediction market and gambling in the United States hinges on competing definitions and regulatory turf wars. Under the Commodity Exchange Act (CEA), event outcomes can be interpreted as commodities—abstract goods on which futures contracts may be legally based.
This interpretation underpins the legal framework for exchanges like Kalshi, which operates under Commodity Futures Trading Commission (CFTC) oversight.
Yet, state gambling laws often describe gambling as risking something of value on an outcome determined predominantly by chance or uncontrollable factors, with the intent of profiting.
For instance, Montana law defines gambling as staking money on an outcome “contingent… upon chance.” This opens the door for state regulators to argue that Kalshi’s election or sports contracts are de facto gambling, regardless of federal classification.
The CFTC, for its part, has maintained an ambiguous stance. Regulation 40.11 prohibits the listing of contracts that involve “gaming” or activities unlawful under state or federal law. While originally meant to prevent morally or legally dubious markets (e.g., assassination contracts), this rule was controversially extended in 2023 to election markets.
However, Kalshi successfully challenged this in federal court, with the judge ruling that the CFTC had failed to justify its position or demonstrate that such markets inherently violated public interest.
🧩 Skill vs. Chance: A Defining Metric?
The degree of skill vs. chance involved in prediction markets also plays a pivotal role in the legal classification. Advocates argue that prediction markets—like stock trading—require research, analysis, and strategy, placing them firmly in the “skill-based” category.
These platforms facilitate price discovery, hedging, and risk management, functions traditionally associated with financial markets.
However, gambling regulators have consistently rejected this framing. In a 2025 letter, the Arizona Department of Gaming argued that there is “no meaningful difference” between wagering on a sports game through a prediction market and betting with a licensed sportsbook.
From a consumer protection standpoint, both activities involve uncertain outcomes with a significant element of chance.
🌐 Federal vs. State Jurisdiction: The Preemption Debate
Kalshi’s legal defense rests on federal preemption—that is, the idea that federal law (in this case, the CEA) supersedes conflicting state laws. This is not without precedent: regulated securities and futures markets are federally shielded from state-level gambling statutes.
However, in the absence of explicit federal support (as in Kalshi’s sports markets), states may still challenge these contracts under local gambling prohibitions.
Polymarket, another player in the space, faced enforcement from the CFTC for operating as an unregistered exchange—highlighting the importance of regulatory compliance at the federal level.
Even federally sanctioned markets are not immune to state-level scrutiny, especially when the outcomes in question (like elections or sports) are specifically outlawed under local gambling codes.
🧮 Conclusion: Speculation or Wagering?
At the heart of the debate is a critical question: When does event-based trading stop being a financial service and start being a bet? The answer, it seems, depends on legal nuance, jurisdictional reach, and evolving societal views on risk, regulation, and fairness.
As prediction markets grow in sophistication and popularity, regulators on both sides—financial and gambling—will be forced to clarify their stances, lest they fall behind an innovation moving faster than the laws that govern it.
