Prediction Markets and the Limits of Federal Power

On election night in November 2025, the culmination of months of trading, the results were not just reported—they were traded. On platforms such as Kalshi and Polymarket, users bought and sold “event contracts” on whether a candidate would win, with prices shifting in real time as new information came in. In the New Jersey governor’s race, Kalshi’s market indicated that Mikie Sherrill would win more than thirty minutes before any major news outlet called the race. As the result became clearer, contracts that had been trading at steep discounts moved rapidly toward full value, tracking the implied probability of the outcome as it changed. [1] What looked like a new form of civic participation also raised a classification problem under the Commodity Exchange Act. More fundamentally, it raises a question of federalism. Absent a clear statement from Congress, should federal derivatives law be read to displace state and tribal authority over gambling?

Although Congress granted the CFTC broad authority over futures markets, it did not clearly address retail event contracts that resemble gambling, meaning contracts that are not tied to hedging or price discovery and instead function as wagers on uncertain real-world outcomes. Because the statute does not resolve that boundary, courts should require a clear statement from Congress before treating such contracts as federally regulated derivatives. The recent rise of prediction markets reflects post-Dodd-Frank regulatory infrastructure and post-Murphy expansion of sports betting, not a deliberate congressional decision to federalize gambling.

An event contract is a type of financial agreement that pays out based on whether an event occurs in the real world. The question is usually framed in binary terms, such as whether a candidate will win an election, with its price fluctuating as the implied likelihood of that outcome changes. A person can buy a contract, typically cash-settled, that pays a fixed amount if the event occurs and nothing if it does not. [2] Event contracts are offered on exchanges regulated by the Commodity Futures Trading Commission (CFTC), the same agency that oversees traditional futures markets. In a standard futures contract, traders agree to buy or sell a commodity, like oil or wheat, at a set price in the future, often to hedge against price risk tied to an underlying commercial exposure. [3] Event contracts differ in their use. They are not tied to any underlying asset or commercial exposure and do not provide a way to manage risk in the way the CEA contemplates. While both futures and event contracts involve uncertainty, futures markets are structured around hedging and price discovery, even though some participants trade speculatively. Event contracts, by contrast, are primarily retail-facing and speculative, with value tied directly to the outcome of an event. This distinction matters under the CEA because the statute is built around markets that serve hedging and price-discovery functions, leaving it uncertain how to classify contracts that do not.

The difference exposes a gap in the CEA, which grants the CFTC broad authority over derivatives markets but does not clearly address retail contracts tied to real-world outcomes. That resemblance, in turn, raises the question of whether these contracts fall within what the federal law describes as “gaming.” The CEA does not clearly define gaming, but the term has generally been used to describe activities that function as wagers on real-world events, especially when they are not tied to a commercial purpose, such as hedging risk. This distinction matters because gambling has long been regulated by states and tribal governments. Whether federal law should displace state authority turns on a question the statute does not clearly answer, and one that courts have not yet resolved with a consistent framework.

The CEA was enacted to regulate commodity futures markets and protect their integrity. Passed in 1936, it establishes the framework for federal oversight of futures trading and authorizes the CFTC to enforce that system. [4] At its core, the Act aims to prevent manipulation, promote fair competition, and support price discovery and hedging in commodity markets. It is built around exchange-based trading and commercial actors using derivatives to manage risk. Traditional futures contracts fit that model: they are tied to underlying commodities and allow market participants to hedge price risk and generate useful price signals. Event contracts do not. They are not tied to commodities or commercial exposure and instead assign value to outcomes without providing a mechanism to manage underlying economic risk. This mismatch creates a classification problem within the statute as the CEA governs hedging-based derivatives but also permits the CFTC to bar contracts that “involve” gaming, a term the statute does not define. [5] As a result, the statute offers little guidance on how to classify contracts that resemble regulated derivatives but function in practice like wagers.

The Dodd-Frank Wall Street Reform and Consumer Protection Act significantly expanded federal regulation of derivatives markets after the 2008 financial crisis. Enacted to address gaps in oversight and excessive risk-taking, it extended the CFTC’s jurisdiction to cover a broader range of swap transactions and market participants. It also imposed new clearing and reporting requirements, strengthened oversight of derivatives trading, and reinforced the role of regulated exchanges and clearing organizations. [6] In doing so, Dodd-Frank made the derivatives market more centralized and transparent.

This expanded framework also formalized the process for reviewing and listing new types of derivative contracts, including event contracts, on designated contract markets. [7] As a result, exchanges now operate within a federal system capable of accommodating new products. Yet Congress did not address retail-facing contracts tied to real-world events. By expanding regulatory authority without defining its limits, Dodd-Frank allowed event contracts to emerge without resolving whether they fall within the statute’s prohibition on “gaming” or within state and tribal gambling authority.

Kalshi’s recent litigation places the statutory ambiguity at the center of the dispute. In the federal case, the CFTC prohibited Kalshi’s proposed “Congressional Control Contracts,” arguing that the contracts “involve” gaming, that many states prohibit betting on elections, and that the contracts were contrary to the public interest because they lacked ordinary hedging or price-basing functions and threatened election integrity. The district court rejected that reading, concluding that elections are not “games,” so election contracts do not fall within the Special Rule’s reference to “gaming,” and construing “involve” to refer to the underlying event being traded on rather than to the fact that some states separately outlaw election betting. This interpretation narrows the scope of “gaming” and leaves unresolved whether contracts that function like wagers, but are tied to lawful events, fall within the CEA. On that view, the underlying events–elections, party control, and election outcomes–are not themselves unlawful. The D.C. Circuit’s stay opinion did not resolve the merits, but it confirmed the appeal turns on the meaning of “gaming,” “involve,” and the scope of the Commission’s authority under the Special Rule. [8] That dispute goes directly to whether federal law can displace state gambling regulation without a clear statement from Congress. 

State litigation has extended the same conflict into sports contracts and sharpened the preemption question. In Nevada, the court granted Kalshi a preliminary injunction after the state tried to treat its contracts as unlicensed sports betting. [9] The court reasoned that the CEA grants the CFTC exclusive jurisdiction over swaps and futures traded on designated contract markets and that allowing fifty-state gambling regulation of a national exchange would defeat the structure. [9] New Jersey reached a similar result, finding that Kalshi was likely to succeed on its claim that federal law preempts state sports wagering laws as applied to its exchange. [10] Maryland, by contrast, denied a preliminary injunction, stressing the presumption against preemption in areas of traditional state police power and finding no clear congressional intent to occupy the field of state gambling regulation. [11] These cases are asking three related questions: whether election- or sports-based event contracts qualify as swaps or futures under the CEA, whether the Special Rule’s reference to “gaming” allows the CFTC to prohibit them, and whether federal authorization of those contracts displaces state gambling law. [12] Each question turns on whether the CEA supplies a clear basis to override state gambling regimes or leaves that boundary unresolved.

Because gambling regulation falls within state police power, the prediction market dispute turns on federal preemption. Courts have long recognized that, in areas of traditional state regulation, federal law does not displace state authority unless Congress clearly says so, a clear statement rule that requires explicit congressional authorization before federal law overrides state control. In Rice v. Santa Fe Elevator Corp., the Supreme Court explained that federal law may preempt state regulation where Congress has occupied the field, but emphasized that courts should not lightly infer such intent, especially in areas traditionally regulated by the states. [13] In Wyeth v. Levine, the Court rejected the argument that federal regulatory approval alone implied preemption, emphasizing that Congress did not intend federal law to displace state authority absent clear evidence in the statutory text. [14] Most directly, Gregory v. Ashcroft requires Congress to speak with “unmistakable clarity” before displacing areas of traditional state concern, particularly where doing so would upset the federal-state balance. [15] These cases establish a strong presumption against preemption in domains historically governed by states.

Gambling falls squarely within that domain. States have long regulated betting and gaming as part of their core police powers, and courts have treated that authority as central to state sovereignty. Against that backdrop, the CEA provides an incomplete answer, and because the statute does not resolve whether event contracts fall within federal derivatives regulation or state gambling law, courts should not infer preemption. The statute grants the CFTC exclusive jurisdiction over futures and derivatives markets, and federal regulators argue that this authority extends to prediction markets. But the CEA does not clearly state that federally listed event contracts override state gambling authority. That omission matters because treating event contracts as federally regulated futures may prevent states from prohibiting them and allow exchanges to bypass state betting frameworks. If they are treated as gambling, however, states retain the authority to regulate or prohibit them within their borders.

Recent litigation reflects this tension, with courts and regulators divided over whether prediction markets are governed by federal derivatives law or state gambling regimes. [16] In some jurisdictions, the conflict has escalated beyond civil disputes. Some courts emphasize the CEA’s grant of exclusive federal jurisdiction, treating prediction markets as part of a nationally regulated derivatives system. Others emphasize the presumption against preemption, especially where Congress has not clearly spoken. As commentators have noted, the central question is whether Congress intended the CEA to displace longstanding state gambling regulation or whether federal authority has limits in this context. The Supreme Court’s decision in Murphy v. National Collegiate Athletic Association reinforces the latter view. [17] There, the Court struck down a federal prohibition on state-authorized sports betting, emphasizing that gambling regulation falls within traditional state authority and rejecting federal efforts to dictate state policy choices. Although Murphy did not involve the CEA, it shows the sensitivity of federal intrusion into state gambling policies. That concern applies here, where federal regulation would displace state systems without clear congressional authorization.

To be sure, one could argue that the CEA’s grant of “exclusive jurisdiction” over exchange-traded futures displaces conflicting state regulation. But that provision assumes the contracts at issue are properly classified as futures. It does not resolve whether retail-facing event contracts that resemble gambling, rather than instruments tied to commercial exposure or risk management, fall within that category. Because the classification is unresolved, exclusive jurisdiction alone cannot determine whether federal law displaces state gambling authority. Without a clear statement addressing that intersection, courts should hesitate before inferring displacement.

Prediction markets also raise issues of tribal sovereignty under the Indian Gaming Regulatory Act (IGRA). IGRA sets up a system for regulating gaming on tribal lands. It divides gaming into categories and requires that Class III gaming, such as casino-style gaming and sports betting, operate under agreements between tribes and states. These agreements often give tribes exclusive rights to certain types of gaming within a state and form the basis of important economic arrangements. [18] However, prediction markets complicate this system. If federally regulated exchanges offer sports-event contracts nationwide, they may operate in states where tribes have exclusive rights to sports betting but are not subject to the same agreements. This creates a workaround, allowing similar activity outside the system to be negotiated between states and tribes. That problem carries over to how courts interpret “gaming” under the CEA. Contracts structured as financial instruments can still function as wagers on uncertain outcomes, especially when they lack any connection to commercial exposure or risk management. Event contracts may generate some information about expected outcomes, but they generally do not serve the hedging or price-discovery roles that justify federal derivatives regulation. Treating them as within that framework would allow federal law to displace tribal and state gaming systems without a clear statement from Congress.

Federal Indian law adds another layer. Courts generally interpret unclear laws in favor of tribes, and Congress must clearly say when it wants to limit tribal authority. Courts have repeatedly applied this rule, refusing to read vague statutes in ways that weaken tribal rights. This reflects the federal government’s special relationship with tribes and functions as a clear statement of the rule in this area. Applied here, nothing in the CEA or Dodd-Frank clearly allows federal derivatives markets to override tribal gaming systems. Without that kind of clear statement, courts should hesitate to allow federal law to displace tribal exclusivity arrangements.

The recent rise of prediction markets is not based on clear authorization from Congress but on how the CFTC has chosen to apply the law. The agency regulates derivatives markets by approving exchanges and overseeing what products they can offer. Within this system, whether event contracts are allowed depends in part on the CFTC’s decisions about what to approve and how to strictly enforce the rules. Prediction markets reflect not just the statute, but also agency discretion. In practice, the agency is determining whether these contracts fall on the derivatives side of the line or within gambling, setting the boundary between financial regulation and state-controlled gaming without clear congressional authorization. But agency decisions cannot replace Congress. When federal law overrides traditional state or tribal authority, that choice must come from Congress, not from how an agency interprets or expands its power.

Prediction markets are not new, and the CEA dates back to the New Deal. The current litigation comes from several developments happening at the same time, not just one change. After Dodd-Frank, the derivatives market became more centralized, creating a clear path for exchanges to list new products. When Kalshi entered this system and received federal approval, it created a direct conflict between federal regulation and state gambling laws. At the same time, Murphy v. National Collegiate Athletic Association expanded state control over sports betting and made regulated wagering more common. As a result, states and tribes have built strong regulatory systems and now depend on revenue from these markets.

These developments explain why the gap in the statute has become hard to ignore, but they also highlight a deeper problem. The CEA was designed to support hedging and price discovery in commodity markets, not to support markets that assign value to political or social outcomes without any underlying commercial exposure or risk-management function. Election-based contracts do not clearly serve a real risk-management purpose and instead bring market thinking into the democratic process. That places them outside the core functions the statute was designed to regulate. In practice, prediction markets have extended beyond elections to contracts tied to geopolitical events, including armed conflict and political leadership changes, where traders can profit from outcomes shaped by rapidly evolving or nonpublic information. This further emphasizes their distance from the hedging and price-discovery purposes that justify federal derivatives regulation. This does not resolve the legal question, but it explains why courts should hesitate before allowing these markets to override existing regulatory systems without clear congressional approval.

The dispute over prediction markets ultimately reflects a gap in the CEA that Congress has not clearly resolved. When federal derivatives law intersects with areas traditionally governed by states and tribes, courts should not assume that Congress intended to displace those regimes. Instead, they should require a clear statement before allowing federal law to override existing systems. Absent that clarity, the expansion of prediction markets should remain a question for Congress, not the courts.

Edited by Anaya Qayyum

Sources

[1] Jaron Zhou & Terry Oldreal, Kalshi’s 2025 Election Hub: A Real-Time Window into Every Race, Kalshi News (Nov. 4, 2025), https://news.kalshi.com/p/kalshi-2025-election-hub-real-time-results

[2] Justin Wolfers & Eric Zitzewitz, Prediction Markets in Theory and Practice, Stan. Grad. Sch. Bus. Working Paper No. 1927 (2006), https://www.gsb.stanford.edu/faculty-research/working-papers/prediction-markets-theory-practice

[3] CME Grp., Definition of a Futures Contract, CME Grp., https://www.cmegroup.com/education/courses/introduction-to-futures/definition-of-a-futures-contract

[4] Commodity Exchange Act & Regulations, U.S. Commodity Futures Trading Comm’n, https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm

[5] Commodity Exchange Act, 7 U.S.C. §§ 1–27f (2025).

[6] Wall Street Reform: The Dodd-Frank Act, The White House, https://obamawhitehouse.archives.gov/economy/middle-class/dodd-frank-wall-street-reform

[7] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[8] KalshiEX LLC v. Commodity Futures Trading Comm’n, No. 24-5205 (D.C. Cir. Oct. 2, 2024).

[9] KalshiEX LLC v. Martin, No. 25-cv-1283-ABA, slip op. (D. Md. Aug. 1, 2025).

[10] KalshiEX LLC v. Hendrick, No. 2:25-cv-00575-APG-BNW, slip op. (D. Nev. Apr. 9, 2025).

[11] KalshiEX LLC v. Flaherty, No. 25-cv-02152-ESK-MJS, slip op. (D.N.J. Apr. 28, 2025).

[12] Kevin Frankel, Kristin Lee, Julie Loftus & Colleen Spehar, Betting on Preemption: Who Regulates America’s Booming Prediction Markets?, N.Y. L.J. (Feb. 24, 2026, 11:51 AM), https://www.law.com/newyorklawjournal/2026/02/24/betting-on-preemption-who-regulates-americas-booming-prediction-markets/

[13] Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947).

[14] Wyeth v. Levine, 555 U.S. 555 (2009).

[15] Gregory v. Ashcroft, 501 U.S. 452 (1991).

[16] Murphy v. Nat’l Collegiate Athletic Ass’n, 584 U.S. 453 (2018).

[17] Indian Gaming Regulatory Act, 25 U.S.C. §§ 2701–2721 (2025).

[18] Alex Tallchief Skibine, Textualism and the Indian Canons of Statutory Construction, 56 Mich. J.L. Reform ___ (2022).