Gambling Laws and Prediction Market Apps

SUMMARY Prediction market apps like Kalshi claim federal CFTC regulation as derivatives exchanges exempts them from state gambling laws, allowing nationwide operation even where betting is banned. Seven states issued cease-and-desist orders, arguing these platforms are essentially unlicensed sportsbooks evading state authority and taxes. Courts have split on preliminary injunctions. This federalism clash pits innovation advocates against states defending their traditional gambling regulatory powers, with potential Supreme Court resolution looming.

Gambling regulation in America has always been complicated, but a new breed of online platforms is pushing that complexity to unprecedented levels. Prediction market apps claim they’re not gambling sites at all, and the legal gymnastics behind that assertion are worth understanding.

For most of American history, states controlled gambling within their borders. Nevada went all-in on casinos in 1931 and built Las Vegas into an entertainment empire. New Jersey followed with Atlantic City decades later. Utah and Hawaii ban gambling entirely. Most states land somewhere in the middle, running lotteries while prohibiting commercial casinos or permitting tribal gaming under federal law while blocking private operators.

Sports betting shows how dramatically this landscape can shift. Congress passed the Professional and Amateur Sports Protection Act in 1992, effectively banning sports wagering nationwide with exceptions for a handful of grandfathered states. That federal prohibition lasted until 2018, when the Supreme Court struck it down in Murphy v. NCAA, ruling that Congress couldn’t force states to enforce federal policy. Since the Murphy decision, over 34 states and Washington D.C. have legalized sports betting.

States restrict gambling for multiple reasons. Religious and cultural values drive much opposition, particularly concerns about addiction, family disruption and predatory practices. Criminal activity worries state officials, as do documented social costs including bankruptcy, domestic violence and suicide. Economic considerations pull in both directions, with some states viewing gambling as revenue while others protect existing gaming interests.

Where gambling is legal, states regulate it heavily. Gaming commissions license operators, conduct background checks, monitor compliance and enforce responsible gaming requirements. They collect substantial taxes and fees. Operators undergo criminal background checks, financial scrutiny and ongoing reporting obligations. Violations bring strict penalties.

Enter prediction market apps, which claim an entirely different set of rules applies to them.

The Federal Regulatory Gambit

Rather than seeking state gaming licenses, these platforms obtained approval from the Commodity Futures Trading Commission as derivatives exchanges. The CFTC traditionally regulates futures and options markets for commodities, currencies and financial instruments. Prediction market operators like Kalshi are regulated by the CFTC as Designated Contract Markets, which are financial exchanges designated to trade futures, swaps and options. Kalshi obtained its federal license from the CFTC on November 3, 2020.

This matters enormously for where they can operate. A traditional sportsbook must obtain a state license and can only function where sports betting is legal. Prediction market platforms assert that CFTC approval allows nationwide operation regardless of state gambling laws. They position themselves as financial markets providing price discovery rather than entertainment gambling venues.

The legal theory relies on federal preemption. When federal and state laws conflict in areas where Congress has constitutional authority, federal law generally wins. Prediction market operators argue that their event contracts are permitted under federal law and that state enforcement efforts are preempted by the Commodity Exchange Act. They point to the exclusive jurisdiction the CFTC holds over derivatives markets.

State regulators reject this characterization completely. In Maryland’s cease-and-desist letter to Kalshi, regulators wrote that “the purchase of the contract is indistinguishable from the act of placing a sports wager”. When someone risks money predicting whether a football team wins or loses, state authorities contend this constitutes sports betting regardless of the regulatory label. The substance matters more than legal classification.

The conflict intensified as prediction markets expanded into sports outcomes. Early prediction markets focused primarily on political events, which generated less opposition. In October 2024, a federal appeals court allowed Kalshi to revive election markets. Sports changed everything, putting prediction markets in direct competition with state-licensed sportsbooks that pay taxes and fees to operate legally.

The State Pushback

State gaming authorities view this as regulatory arbitrage that undermines their authority and deprives states of tax revenue. Someone in a state where sports betting remains illegal can theoretically trade sports event contracts on a CFTC-regulated prediction market despite the state’s gambling prohibition. Traditional operators cannot offer sports betting in such states without breaking state law.

Seven states have sent cease-and-desist letters to Kalshi in recent months. Massachusetts Attorney General Andrea Campbell filed a lawsuit against Kalshi to stop sports event markets, while a coalition of 34 state attorneys general filed a brief supporting New Jersey’s legal case. Gaming regulators in Nevada, Arizona, Maryland, New Jersey, New York, Illinois, Ohio and Connecticut have all taken enforcement actions or issued warnings.

Kalshi has taken three state regulators to court, arguing it does not fall under their jurisdiction because it is a financial exchange, not a sportsbook. In Nevada, U.S. District Judge Andrew P. Gordon entered a preliminary injunction against the state, finding that Kalshi was likely to prevail on its federal preemption argument. In New Jersey, U.S. District Judge Edward S. Kiel issued a preliminary injunction preventing the state from enforcing its cease-and-desist order. However, in Maryland, the court denied Kalshi’s request for a preliminary injunction, citing a strong presumption against preemption and noting that regulating gambling is at the core of the state’s residual powers.

The Federalism Debate

This battle represents a fundamental clash over federalism and regulatory philosophy. Prediction market advocates argue their model democratizes financial markets and provides valuable information through price discovery. They contend that innovation requires federal regulatory uniformity rather than navigating fifty different state regimes.

State authorities counter that the Commodity Exchange Act expressly contemplates continued state authority over conduct like gambling. A brief signed by 34 state attorneys general argued that “when Congress removes the States’ historic police powers, it does not whisper in the dark of night” and that nothing in the Commodity Exchange Act clearly signals Congress was trying to strip states of their traditional power to regulate sports gambling.

The Arizona Department of Gaming stated: “The State does not accept the idea that for years states have blindly passed legislation and regulated event wagering without knowing that Congress secretly upended its historical approach to gambling in the Commodities Exchange Act”.

Voters in many states explicitly rejected sports betting or other gambling expansion, yet prediction markets claim authority to override those choices through federal preemption.

The gambling industry itself remains divided. Traditional casino operators and sportsbooks generally oppose prediction markets as unlicensed competition. Some major gambling companies explored entering the prediction market space themselves. Robinhood launched a prediction markets hub powered by Kalshi in March 2025. Others pushed for federal legislation that would subject prediction markets to state gambling laws or limit the types of events offered.

How the Platforms Function

Prediction market apps function as online platforms where users trade contracts tied to future events like elections, sports games, weather patterns or company earnings. The price of each contract represents the market’s collective assessment of how likely that event is to occur.

Kalshi operates under federal CFTC regulation as a Designated Contract Market. The platforms maintain that their contracts represent financial instruments rather than wagers, though critics note that the functional experience closely resembles placing bets. Kalshi has formally requested CFTC approval to introduce event-based derivatives tied to major American sports leagues including the NFL, NHL, NBA and NCAA.

The Uncertain Path Forward

The regulatory landscape remains fluid and uncertain. Federal legislation could clarify the CFTC’s jurisdiction over these markets or restrict certain types of event contracts. Individual states might craft laws explicitly banning or regulating prediction markets within their borders. Depending on how things go in courtrooms at the state level, a final resolution could be left to the Supreme Court.

If Kalshi’s constitutional preemption argument prevails, all individuals—even those residing in states where sports betting is outlawed—could access sporting event contracts on federal exchanges, potentially upending the state-by-state system established after Murphy v. NCAA.

For now, prediction market apps exploit the gap between federal financial regulation and state gambling enforcement. Kalshi reached $1 billion in monthly volume and now dominates 62% of the global prediction market industry. They operate even in states with comprehensive gambling bans by relying on CFTC oversight and the absence of state laws specifically targeting their business model. This arrangement persists despite significant legal uncertainty and active opposition from state authorities who view these platforms as circumventing voter-approved gambling restrictions.

As the industry grows, pressure from traditional gambling operators and state regulators continues mounting. The outcome of ongoing litigation could reshape the entire industry, particularly regarding contracts on sports events that most closely resemble conventional sports betting. The distinction between gambling and financial prediction remains fundamentally contested, and the courts will ultimately decide whether federal derivatives regulation can override state gambling laws.