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Prediction markets spent years operating in a legal gray zone that suited almost nobody.
State regulators called them gambling. Crypto traders treated them like speculative assets. Federal officials alternated between skepticism, lawsuits, and selective enforcement. Platforms themselves often described the products differently depending on which regulator happened to be asking questions.
Now the Commodity Futures Trading Commission is trying to force the issue into a formal federal structure.
The agency has submitted its proposal on event contracts to the White House Office of Management and Budget, beginning the formal rulemaking process that could reshape the entire prediction market industry. The proposal has not yet been released publicly, but the broader direction is no longer difficult to read. Inside the agency, the debate appears to have shifted away from whether prediction markets should exist at all and toward how tightly they should be supervised as financial products.
That marks a significant change from where the sector stood even a year ago.
Prediction markets have operated under constant legal pressure since the surge in retail interest surrounding elections, geopolitical conflicts, and sports outcomes. Platforms like Kalshi and Polymarket attracted massive trading volumes by turning public events into tradeable contracts, but growth arrived faster than any settled regulatory framework. The result was a fragmented market where some firms sought federal licensing while others operated largely through offshore or crypto-based structures.
For regulators, the central question never really changed: are these bets, or are they derivatives?
The CFTC increasingly appears determined to answer that question in favor of the latter.
Chairman Michael Selig indicated in January that the commission planned to develop formal rules specifically addressing prediction markets after backing away from an earlier proposal that would have restricted certain political and sports event contracts. The withdrawal was widely interpreted inside the industry as recognition that outright containment of the sector was becoming unrealistic.
Trading volumes were expanding too quickly. Political interest was growing. And attempts to suppress the products outright risked pushing activity further offshore.
Then came a sharper statement in April from Enforcement Director David Miller, who publicly argued that insider trading laws apply directly to prediction markets because event contracts should be treated as swaps under federal law rather than gaming products. That position carries major consequences beyond semantics.
If prediction markets are formally classified as derivatives venues, they inherit the compliance obligations that govern traditional financial exchanges.
That means know-your-customer rules. Surveillance systems. Monitoring for manipulation. Internal controls designed to detect misuse of non-public information. Broker oversight. Recordkeeping obligations. Potential reporting requirements. The entire architecture of regulated financial trading begins to apply.
Some firms are already moving in that direction before any final rules exist.
Kalshi recently suspended and fined three U.S. political candidates who allegedly traded on their own election outcomes. The company framed the enforcement action as evidence that regulated prediction markets can operate with the same integrity standards expected in traditional finance.
The symbolism mattered almost as much as the penalties themselves. Prediction market firms have long faced accusations that their products invite manipulation or insider abuse because traders can possess direct knowledge about political campaigns, corporate activity, or unfolding events. By policing candidate trading internally, Kalshi was effectively making a case to regulators that these markets can survive under a financial supervision model.
The CFTC has also stepped up its own enforcement posture. Regulators recently charged a Google employee accused of using confidential company information to place trades on Polymarket tied to corporate developments. Separately, congressional investigators sought KYC and trade-surveillance records from both Kalshi and Polymarket during probes connected to geopolitical-event trading activity.
None of that resembles the regulatory treatment normally associated with sportsbooks.
States Are Refusing To Back Down
The federal push is colliding directly with state governments that view the industry very differently.
Minnesota, New York, Illinois, Arizona, and Connecticut have all argued in various forms that prediction markets amount to gambling operations subject to state betting laws and licensing requirements. Some state officials have warned that allowing federally regulated event contracts to expand unchecked would effectively create a nationwide betting industry outside state gaming oversight.
That concern is partly financial. Sports betting and gaming taxes have become significant revenue sources for many states. A federally protected prediction market industry could bypass large portions of the state gambling framework entirely.
But the dispute also cuts deeper than tax collection.
State regulators generally focus on the activity itself: people wagering money on uncertain future outcomes. The CFTC focuses on the structure of the contract being traded. Under the federal view, event contracts are financial instruments whose value depends on future occurrences, placing them within commodities and derivatives law regardless of whether the underlying event involves elections, sports, economics, or geopolitics.
That conflict has never been fully resolved in court.
Instead, the industry has existed inside overlapping legal theories where federal commodities law, state gambling law, securities concerns, and crypto regulation all intersect uneasily. Different regulators have often approached the same platforms from completely different legal angles.
The White House has largely aligned itself with the federal position.
Trump recently described prediction markets as a major emerging industry and warned that fragmented state-by-state restrictions could damage American competitiveness in digital finance. The administration’s broader posture toward crypto and alternative financial infrastructure has reinforced the idea that Washington increasingly views prediction markets less as a gambling problem and more as a financial innovation issue.
That political backing matters because the CFTC’s authority over event contracts has repeatedly faced external pressure. Every enforcement action now carries broader implications for how much control federal regulators ultimately retain over the sector.
The industry itself is evolving faster than the legal framework around it.
What began largely as election speculation has expanded into contracts tied to inflation data, Federal Reserve decisions, corporate events, wars, weather outcomes, entertainment releases, and sports championships. Traders increasingly use prediction markets not just for speculation but as information tools, treating prices as probabilistic indicators of future events.
Supporters argue those markets produce useful forecasting data and improve price discovery around uncertain events. Critics see a rapidly expanding betting ecosystem wrapped in financial terminology.
The upcoming rulemaking process may finally force regulators to define where the line sits.
For brokers, exchanges, and fintech firms exploring entry into the market, the stakes are substantial. A unified federal framework could allow prediction markets to scale nationally under a single regulatory system similar to other derivatives products. If states retain broad authority to classify the products as gambling, firms could face a patchwork of licensing regimes, operational restrictions, and legal uncertainty that limits expansion.
Neither side appears ready to retreat.
And after years of operating in regulatory limbo, prediction markets are moving toward the first real attempt to decide what they actually are.
