Prediction markets, which offer a platform where participants can enter into contracts based on the outcomes of future events, are increasingly gaining the attention of both state and federal regulators. Recent court challenges are beginning to provide some clarity for both participants and the markets themselves on a core question: Who exactly has the authority to regulate these event markets?
The Commodity Futures Trading Commission (CFTC) has filed suit in several federal courts seeking to block states' efforts to apply and enforce long-established state betting laws. The CFTC’s recent suit against Wisconsin is an attempt to stop the state’s claims that five platforms offered illegal bets through their event contract offerings, arguing that the CFTC is the appropriate regulator of designated contract markets (DCMs) and preempted state laws could not be applied "to national markets that are governed by federal law." The Wisconsin lawsuit, one of many cases filed by the CFTC, sets up a significant test of the boundary between federal commodities regulation and the reach of state gambling laws, as well as questions regarding the nature of transactions occurring on prediction markets.
The economic incentive of accurately "predicting" the outcome of future events is intended to reflect public sentiment regarding the most likely outcome of the event. However, the event contracts can be characterized simply as individual’s attempts to make a profit, a position that aligns with the states' position that the event contracts are illegal bets.
The CFTC’s complaint against Wisconsin’s attorney general, filed April 28, 2026, alleges that Wisconsin’s enforcement actions against several trading platforms, including Kalshi, Robinhood, Polymarket, and Crypto.com, are preempted by federal law and unlawfully interfere with the CFTC’s exclusive jurisdiction over derivatives markets. Similar cases brought by state attorneys general and challenged by the CFTC are the latest development involving prediction markets.
Federal Preemption at the Center of the Case
The CFTC’s lawsuit against Wisconsin is in response to the state’s actions filed against certain trading platforms offering sports-related "event contracts" and asserting that the platforms were facilitating illegal gambling in violation of state law and creating a public nuisance. Wisconsin’s lawsuits seek declaratory relief and injunctions prohibiting these companies from offering such contracts to residents of the state.
The federal government and the CFTC challenge Wisconsin’s attempts to limit the companies from offering event contracts without being subject to state gambling laws. Rather than fall under state regulation, they argue that the targeted products are traded on CFTC-regulated exchanges and therefore fall within a comprehensive federal regulatory framework established under the Commodity Exchange Act (CEA). The federal government also argues that the CEA reflects a longstanding congressional effort to avoid a patchwork of state-by-state regulation that could disrupt national derivatives markets. The CFTC emphasizes that state enforcement actions targeting federally regulated trading platforms risk undermining the uniformity and predictability that the federal framework is designed to ensure.
The commission has also filed lawsuits against Connecticut, Illinois, and New York, and has filed amicus briefs in the U.S. Court of Appeals for the Ninth Circuit and the Supreme Judicial Court of Massachusetts. The CFTC is also showing support directly for the DCMs. On May 28, 2026, the CFTC filed a motion to intervene in a case by KalshiEx LLC in the U.S. District Court for the District of Rhode Island. The CFTC asked the court to grant a preliminary injunction to halt the state’s efforts to regulate sports-related event contracts as sports betting subject to state gambling laws. In its motion, the CFTC argues that the question of jurisdiction over all event contracts was settled in 1974 "when Congress created the Commission and gave it 'exclusive jurisdiction'" over futures trading. Whether characterized as derivatives or more specifically as swaps, the event contracts are a form of futures trading and subject to the CFTC’s oversight, according to the motion.
It is these cases that will build two lines of precedent for prediction markets: if CFTC regulated the markets, how will the commission police the markets for compliance with the platforms' surveillance obligations and carry out enforcement against the use of confidential or insider information? If states have jurisdiction over the platforms, how will states differentiate prediction trading platforms from existing regulations over sports betting?
Tension Between State Gambling Authority and Federal Market Regulation
Wisconsin’s position, as reflected in its enforcement actions, is that certain event contracts, particularly those tied to sporting outcomes, function as bets and therefore fall within the state’s authority to regulate gambling activity.
The federal complaint rejects that characterization, asserting that when event contracts are structured and traded as derivatives on CFTC-regulated exchanges, they are subject to federal oversight. Even though the CFTC argues that the event contracts are derivatives subject to federal regulation, their main argument appears to be that it is the exchange - not simply the contract - that implicates federal statute.
This dispute highlights a broader regulatory tension as prediction markets and event-based derivatives continue to expand. The classification of these instruments, whether as financial products or forms of gambling, has significant implications for how they are regulated and which governmental entities have authority.
Potential Implications for Prediction Markets
The outcome of the CFTC challenges against several states could have meaningful consequences for the evolving prediction markets ecosystem and for the broader derivatives industry.
If the CFTC prevails, the decision may reinforce federal regulatory authority over event contracts traded on registered DCMs and limit the ability of states to apply gambling laws to those markets. Conversely, if the position taken by states that sports-based event contracts are no different from sports betting gains traction, companies operating in this space could face increased scrutiny from state regulators and potentially conflicting regulatory obligations.
The compliance requirements in the proposed rule will affect not only the prediction markets, but also entities that are in possession of confidential information or non-public information considered material to an investor’s choice to engage in an event contract. For sporting event contracts specifically, employees of professional sports leagues or associated with individual teams could have knowledge of a player’s injury, individual circumstances, or other factors that could affect performance and potentially impact the outcome of the event. While compliance obligations ultimately fall on the prediction markets, they will need to understand how relevant entities or associations police their own employees.
More broadly, the case underscores the challenges posed by financial innovation that blurs traditional regulatory lines. As platforms continue to develop new products tied to real-world events, questions regarding jurisdiction, classification, and compliance are likely to remain at the forefront.
As these cases proceed, market participants and other stakeholders should monitor developments closely, as the court’s resolution of these issues may help define the regulatory landscape for prediction markets and related financial products.
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