Prediction Markets Are Testing the Architecture of American Sports Betting

Strategic Analysis | September 19, 2026

Put the same proposition on two different screens.

On one, a customer puts money on an NFL team to cover a 7.5-point spread through a state-licensed sportsbook. On the other, the customer buys a contract that pays $1 if that same team covers 7.5 points on a federally regulated prediction market.

To the customer, the economic proposition may look almost identical.

Legally, the difference could redraw American sports betting.

The first transaction sits inside the regulatory structure that developed after Murphy v. NCAA: state authorization, gaming licenses, geofencing, wagering taxes, responsible-gaming requirements, restrictions on particular bets, and—where applicable—tribal gaming rights.

The second may sit inside an entirely different system: the Commodity Exchange Act, a Commodity Futures Trading Commission-regulated exchange, federal derivatives rules, and potentially federal preemption of those same state gambling laws.

That is why the prediction-market fight has become more important than the usual framing of Kalshi versus state gaming regulators suggests.

This is a fight over regulatory architecture.

And, at its core, it is a fight over who gets to define gambling.

Much of the litigation is described as a preemption dispute: does federal commodities law override state gambling law?

That skips a step.

The Commodity Exchange Act gives the CFTC “exclusive jurisdiction” over certain transactions involving swaps traded on designated contract markets, or DCMs. The Act defines a “swap” broadly enough to include a transaction whose payment depends on an event or contingency “associated with a potential financial, economic, or commercial consequence.”

If a sports event contract qualifies as a swap, Kalshi’s argument becomes powerful: Congress placed the transaction inside a federally regulated market and gave the CFTC exclusive jurisdiction over it.

If it does not, much of the preemption theory collapses before it gets started.

That threshold question has now divided two federal courts of appeals.

In April, the Third Circuit held in KalshiEX LLC v. Flaherty—at the preliminary-injunction stage—that Kalshi had shown a reasonable likelihood that New Jersey’s gambling laws were preempted. The court concluded that sports event contracts fit the statutory definition of swaps because sporting outcomes can carry economic consequences for sponsors, advertisers, broadcasters, franchises, and others. Once the contracts fell inside the swap definition, the court treated trading on Kalshi’s federally regulated DCM as territory Congress had assigned to the CFTC.

The Ninth Circuit went the other way in August.

In KalshiEX LLC v. Assad, the court agreed with an important premise: if a transaction is a swap traded on a DCM, the CEA’s exclusive-jurisdiction provision has preemptive force. But it concluded Kalshi had not shown that ordinary sports event contracts are swaps in the first place. Reading “associated with” as broadly as Kalshi proposed, the court reasoned, would threaten to turn almost any sports wager into a federally regulated derivative merely because sports have economic consequences somewhere downstream.

That distinction is the center of the dispute.

The argument is not simply federal power versus state power.

It is classification as jurisdiction.

Whoever wins the classification question may largely determine who gets the regulatory authority that follows.

There is another complication that gets lost in the public debate.

A sports event contract does not necessarily have to be either “gambling” or a “derivative.”

The Commodity Exchange Act itself recognizes that federally regulated event contracts may “involve” gaming.

Congress created a special rule allowing the CFTC to scrutinize event contracts involving gaming, terrorism, assassination, war, or activity unlawful under federal or state law and, in appropriate circumstances, determine that such contracts are contrary to the public interest.

That language matters because it undermines a deceptively simple argument heard on both sides.

State regulators can plausibly say: Look at the product. It is plainly a sports bet.

Prediction markets can respond: Even if it involves gaming, Congress expressly contemplated gaming-related event contracts inside the CEA.

Those propositions are not necessarily contradictory.

The CFTC’s pending 2026 rulemaking makes the point unusually clear. Its proposed definition of “gaming” would cover activities undertaken for recreation or entertainment, governed by rules, and producing measurable outcomes dependent on luck, skill, or athletic ability—a definition expressly designed to encompass professional sports.

Yet the same proposal does not say every sports-related contract should therefore be prohibited.

To the contrary, the Commission preliminarily proposed that contracts settling on matters such as final scores, point differentials, wins and losses, tournament advancement, and individual or team statistical performance can provide price-discovery or informational value and may weigh against a finding that the contract is contrary to the public interest. Other products—including certain athlete-injury, officiating, misconduct, and youth-sports contracts—would raise substantially different concerns.

That produces a far more interesting legal structure than “bet versus investment.”

Under the CFTC’s proposed framework, a transaction could involve gaming and nevertheless remain potentially appropriate for a federally regulated derivatives market.

The question is no longer merely what the product resembles.

It is which statute gets to classify it—and what consequences attach to that classification.

The irony is that the modern sports-betting industry was built on a Supreme Court opinion emphasizing state authority.

In Murphy v. NCAA, the Court struck down PASPA’s attempt to prohibit states from authorizing sports wagering. But the Court was equally explicit about what it was not holding: Congress remains free to regulate sports gambling directly. If Congress does not, the states may make their own choices.

Prediction-market litigation is now testing the premise hidden inside that sentence.

Did Congress already regulate part of sports wagering directly—without calling it sports wagering—when it amended the Commodity Exchange Act?

The Third Circuit’s answer is effectively yes, at least where the product falls within the swap definition and trades on a federally regulated DCM.

The Ninth Circuit viewed that theory much more skeptically. It reasoned that interpreting Dodd-Frank to transform the CFTC into a national sports-gambling regulator would assign extraordinary significance to statutory language enacted in a financial-reform statute. The court invoked the major-questions doctrine and concluded that Congress had not quietly taken a “wrecking ball” to the state and tribal systems governing gambling.

That disagreement explains why these cases feel larger than their immediate facts.

No one seriously disputes that Congress could enact a national sports-wagering regime.

The question is whether it already created a federal lane through the derivatives laws.

The legal fight matters because the two systems produce very different businesses.

State-regulated sports betting is deliberately fragmented. Operators obtain authority jurisdiction by jurisdiction. States decide whether wagering is permitted, which operators may participate, which events may be offered, what age limits apply, how bets must be advertised, what responsible-gaming protections are required, and how much tax revenue the state receives.

That system now supports an enormous industry. According to the American Gaming Association, state-regulated commercial sportsbooks handled approximately $166.9 billion in wagers in 2025, generated about $17 billion in revenue, and paid roughly $3.7 billion in sports-betting taxes. The AGA is an industry trade association and an active opponent of prediction-market sports contracts, but those state-reported figures illustrate the economic scale of the existing system.

A successful federal prediction-market model offers something structurally different.

Rather than securing a sports-wagering license from every jurisdiction, an operator can attempt to distribute event contracts through a CFTC-regulated DCM and futures infrastructure. If the federal-preemption theory succeeds, much of the state wagering apparatus—including some licensing restrictions and wagering-specific taxation—may simply not apply to the transaction.

That is not a minor compliance distinction.

It is a different cost structure, distribution model, and competitive moat.

And prediction markets are no longer small enough to dismiss as an academic experiment. The CFTC reported that trading volume across federally registered prediction markets exceeded $25 billion in 2025. Robinhood reported 13.6 billion event contracts traded through its platform in the second quarter of 2026 alone. Those measures are not directly comparable, but both show how rapidly the market has scaled.

The growth is also heavily tied to sports. Axios reported this month that roughly 80% of Kalshi’s trading volume since July 2024 has involved sports.

That makes the regulatory dispute inseparable from competition.

Prediction markets are not merely asking for permission to offer an unusual financial instrument.

They are competing for the same attention, the same games, and increasingly the same customers as sportsbooks operating under a far more localized regulatory model.

Perhaps the clearest sign that this is a structural shift is that traditional sportsbook companies are no longer standing entirely outside the prediction-market ecosystem.

DraftKings acquired Railbird and its CFTC-designated exchange in 2025, expressly describing the transaction as a foundation for entering prediction markets and expanding through regulated event contracts.

FanDuel has gone even further operationally. FanDuel Prediction Markets is registered as a futures commission merchant and offers event contracts through CFTC-regulated exchanges, including CME; it has also expanded its sports and entertainment offerings through Crypto.com’s OG Prediction Markets.

That should change how the competitive landscape is understood.

The industry is not cleanly dividing into sportsbooks on one side and prediction markets on the other.

Sophisticated incumbents are building optionality in both systems.

The logic is straightforward. If sports event contracts survive as a nationally distributed federal product, an incumbent sportsbook does not want to discover that its competitors acquired a cheaper or broader regulatory pathway while it remained confined to state-by-state wagering licenses. If state regulators ultimately prevail, the established sportsbook operators still possess the licenses, regulatory relationships, technology, and market access that made the existing system valuable in the first place.

In other words, the smartest hedge on regulatory uncertainty may be regulatory diversification.

States likewise have considerably more at stake than bureaucratic pride.

A state sports-betting regime is an exercise in policy differentiation.

One jurisdiction may permit mobile wagering broadly. Another may restrict college bets. Another may prohibit sports betting altogether. States can impose self-exclusion systems, advertising rules, licensing standards, integrity obligations, geolocation requirements, and taxes calibrated to their local policy choices.

From the states’ perspective, a federally regulated sports contract available notwithstanding those choices does more than introduce a competitor.

It potentially changes who gets to make the choice.

The fiscal consequences are also obvious. State sports-betting taxes have become meaningful revenue sources, while federally regulated event contracts do not automatically carry the same state wagering-tax obligations. The AGA has therefore argued that prediction markets threaten both state revenue and the consumer-protection structure attached to licensed wagering. Those claims come from an interested industry participant, but the underlying incentive is real: regulatory classification determines which system collects the economic rent.

Tribal gaming adds another layer—and this one cannot be reduced to ordinary state preemption.

On September 16, the Ninth Circuit held in Blue Lake Rancheria v. Kalshi that two California tribes were likely to succeed in treating sports event contracts entered from tribal lands as class III gaming under the Indian Gaming Regulatory Act. Critically, the court explained that even CFTC authority over derivatives would not necessarily displace IGRA. The statutes regulate different things and can operate simultaneously.

That decision exposes a second-order problem for the dream of a perfectly uniform national prediction market.

Even if an exchange ultimately establishes that the CEA preempts state gambling regulation of qualifying swaps, that does not necessarily create an all-purpose federal immunity from other federal laws governing the same transaction.

Federal uniformity may itself have borders.

The CFTC is no longer a passive observer to these cases.

The Commission has filed briefs defending its claimed exclusive jurisdiction and has affirmatively sued states—including New York, New Mexico, and Kentucky—seeking to prevent application of state gambling laws to federally registered markets.

It is also rewriting the regulatory framework.

The Commission withdrew the prior administration’s 2024 event-contract proposal in February, opened a new prediction-market rulemaking in March, and in June proposed a significantly more detailed framework for deciding when an event contract involves gaming and when such a contract is contrary to the public interest.

That rulemaking could materially alter the litigation.

The Ninth Circuit relied in part on the current version of Regulation 40.11, which it interpreted as prohibiting DCMs from listing gaming-related contracts. The court expressly noted that the CFTC’s proposed amendment had no present legal effect.

A final rule could therefore remove or reshape one obstacle.

But it cannot necessarily resolve the most fundamental one.

An agency can interpret and administer the statute Congress gave it. It cannot conclusively decide for the judiciary whether Congress actually placed ordinary sports wagers within the statutory definition of “swap.” That is especially true after Loper Bright, under which courts independently interpret ambiguous statutory provisions rather than deferring to an agency merely because the statute is unclear—a point the Ninth Circuit itself emphasized.

The CFTC can strengthen the federal regulatory case.

It cannot simply declare the federalism dispute over.

The conflict is no longer theoretical.

New Jersey filed a petition for certiorari on September 2 asking the Supreme Court to review the Third Circuit’s decision in Flaherty.

Days later, Robinhood filed its own conditional petition arising from the Ninth Circuit’s Nevada ruling. Its petition expressly identifies a 1–1 circuit split over whether the Commodity Exchange Act preempts state gaming laws as applied to federally traded sports event contracts. Interestingly, Robinhood also argues that the Court might prefer to wait for the CFTC’s forthcoming rule and additional appellate decisions before resolving the issue.

Kalshi, meanwhile, sought rehearing of the Ninth Circuit ruling on September 9. Other prediction-market disputes are already moving through additional circuits.

One procedural qualification matters: the major appellate decisions so far arose in preliminary-injunction proceedings. They address likelihood of success and interim relief, not final merits judgments after a full trial record.

That limits what each decision formally settles.

It does not eliminate the commercial consequences.

A federally regulated market cannot sensibly build a nationwide product strategy while the identical transaction may be federally protected in one circuit and expose the company to state enforcement in another.

The legal uncertainty itself becomes regulation.

Prediction markets are forcing American sports betting to answer its foundational question in reverse.

Murphy asked whether Congress could dictate how states regulate sports gambling and held that it could not do so indirectly through PASPA.

The new cases ask whether Congress already created a direct federal lane—through derivatives law—that states cannot regulate when a sports outcome is packaged as a qualifying event contract.

That is a much harder question than whether Kalshi “looks like” a sportsbook.

The Third Circuit says the statutory definition of a swap can reach these contracts and, once it does, federal exclusivity follows.

The Ninth Circuit says that reading asks ordinary financial-law language to accomplish a transformation of gambling regulation that Congress never clearly authorized.

The CFTC is attempting to build a regulatory framework capable of accommodating at least some sports-related prediction markets. States and tribes are defending systems built around local control, gaming policy, licensing, taxation, and sovereignty. And the largest commercial players are increasingly positioning themselves to operate on either side of the line.

That is why the real asset being contested may not be a sports-betting license or even a customer base.

It may be the legal category attached to the product.

Because once the law decides what the transaction is, much of the rest of the industry follows.