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What prediction markets are

A prediction market is an exchange on which participants buy and sell contracts whose payoff is contingent on the occurrence or non-occurrence of a specified future event. The most common form is a binary event contract: the contract pays $1 if the predicted outcome occurs and $0 if it does not. The market price between $0 and $1 reflects the participants’ aggregate assessment of the probability of the outcome. Because prices update continuously as new information arrives, prediction markets function as both a speculative venue and an information-aggregation mechanism.

The principal U.S.-accessible prediction-market operators in early 2026 are: Kalshi (CFTC-registered Designated Contract Market since 2020, headquartered in New York); Polymarket US (relaunched domestic operations via the July 2025 acquisition of QCEX, a CFTC-licensed DCM, after the Trump administration’s closure of prior DOJ and CFTC investigations); PredictIt (operating under a no-action letter from the CFTC, with per-trader caps raised to $3,500 following the July 2025 favorable judgment in the Western District of Texas); Gemini Titan (CFTC-approved DCM as of December 2025); and LedgerX/MIAX. Crypto exchange Coinbase and brokerage platform Robinhood offer prediction-market access through partnerships with Kalshi. Crypto.com operates its own prediction-market product. The industry has projected approximately $200 billion in total trading volume for 2026.

The federal regulatory framework

Prediction-market event contracts are regulated under the Commodity Exchange Act (CEA, 7 U.S.C. §§ 1 et seq.) and CFTC regulations promulgated thereunder. The starting point is the CEA’s broad definition of “swap” in Section 1a(47), which includes any agreement “that provides for any purchase, sale, payment, or delivery… that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.” Section 2(a)(1)(A) grants the CFTC “exclusive jurisdiction” over swaps and certain other instruments traded on designated contract markets.

Operators that wish to list event contracts ordinarily register with the CFTC as a Designated Contract Market (DCM) under CEA Section 5 and the implementing regulations at 17 C.F.R. Part 38. A DCM may self-certify a new contract for listing under 17 C.F.R. § 40.2, with limited prior review by the Commission. The CFTC retains the authority to disapprove specific event contracts under what is commonly called the “Special Rule” for event contracts, codified at CEA Section 5c(c)(5)(C) and 17 C.F.R. § 40.11. Under the Special Rule, the Commission may prohibit a contract that “involves, relates to, or references” activity that is (i) unlawful under any federal or state law, (ii) terrorism, (iii) assassination, (iv) war, (v) gaming, or (vi) other similar activity determined by the Commission to be contrary to the public interest.

The Special Rule was the basis for the CFTC’s September 2023 disapproval of Kalshi’s Congressional Control Contracts (the “political event contracts”), which the Commission found involved both “gaming” and “activity that is unlawful under state law.” That disapproval was reversed by the U.S. District Court for the District of Columbia in September 2024 (KalshiEX LLC v. CFTC, Judge Cobb), which held that the CFTC had construed the Special Rule too broadly: the “involves” language refers to the underlying event, not the act of trading itself, and elections are not “gaming” or “unlawful activity” under the ordinary meaning of those terms. The D.C. Circuit denied the CFTC’s emergency motion to stay the ruling in October 2024, and the CFTC under new administration dropped its appeal on May 5, 2025.

In May 2024 the CFTC had proposed amendments to Rule 40.11 that would have explicitly defined “gaming” to include staking value on the outcome of a political contest and would have categorically classified political event contracts as contrary to the public interest. The proposed rulemaking was never finalized. In February 2026 the CFTC formally withdrew the proposed amendments along with Staff Advisory Letter 25-36, citing the ongoing litigation and state enforcement landscape. The result is that the regulatory framework for event contracts now rests on the original 1996 version of Rule 40.11, as construed in the Kalshi litigation, with the Commission’s enforcement posture under Chairman Michael Selig and Director of Enforcement David Miller now actively supportive of prediction-market operators against state encroachment.

DCMs are also subject to ongoing core-principles obligations under CEA Section 5(d), including the duty to list only contracts that are “not readily susceptible to manipulation” (Core Principle 3), the obligation to maintain market surveillance and abusive-trading-practice prohibitions (Core Principles 4 and 12), and the duty under CFTC Rule 38.151(b) to provide “impartial access” to all eligible participants nationwide. The impartial-access requirement is central to the federal preemption argument, addressed below: if a DCM is federally required to admit all eligible participants while a state simultaneously bans the contract, compliance with both regimes is impossible.

The federal-state preemption battle

The defining legal question of the moment is whether the CEA’s grant of “exclusive jurisdiction” to the CFTC over swaps traded on DCMs preempts state gambling laws as applied to event contracts. The CEA does not contain an express preemption clause directed at state gambling laws. Operators and the CFTC rely instead on field preemption (Congress occupied the field of derivatives regulation through CEA Section 2(a)(1)(A)) and conflict preemption (both impossibility, given the Rule 38.151(b) impartial-access requirement, and obstacle, given Congress’s design of a uniform national market).

As of May 2026, courts have divided sharply. The pro-preemption decisions include the U.S. Court of Appeals for the Third Circuit’s April 2026 ruling in Kalshi v. New Jersey (2-1, Judge Porter writing), which held that Kalshi’s sports-related event contracts are swaps under CEA Section 1a(47), the CFTC has exclusive jurisdiction, and New Jersey may not enforce its gambling laws against them. The Third Circuit’s decision was the first federal appellate ruling on the prediction-market preemption question. Federal district courts in the District of New Jersey (prior to appeal), the District of Nevada (initial injunction subsequently dissolved), and the Middle District of Tennessee (Judge Trauger, February 19, 2026) have similarly ruled for the operators. The Tennessee decision is notable for its post-Loper Bright analysis: Judge Trauger expressly questioned whether the CFTC’s interpretation of “swap” warranted any deference, then conducted independent textual analysis and concluded the contracts are swaps anyway.

The pro-state decisions include the District of Maryland (conflict and obstacle preemption rejected) and the Suffolk County Superior Court of Massachusetts (January 2026 preliminary injunction against Kalshi). The Massachusetts ruling was subsequently stayed by the state Appeals Court, and the case is widely expected to reach the Supreme Judicial Court of Massachusetts; the CFTC has filed an amicus brief there. Courts ruling against operators have generally emphasized (i) traditional state police power over gambling, (ii) the presumption against preemption in areas of traditional state regulation, and (iii) congressional intent under the Dodd-Frank Act, which addressed the 2008 financial crisis rather than sports wagering.

The CFTC under Chairman Selig has taken an unusually offensive posture. The Commission has filed its own federal lawsuits against state regulators in Arizona, Connecticut, Illinois, New York, and Wisconsin, seeking declaratory and injunctive relief that state enforcement actions are preempted. The Commission has obtained at least one temporary restraining order (against Arizona) and has filed amicus briefs supporting Kalshi in the Third Circuit, Ninth Circuit, and Massachusetts SJC. The Ninth Circuit is hearing appeals from the Nevada cases, and a Fourth Circuit case in which more than 36 state attorneys general have filed amicus briefs supporting state authority is also pending.

Two recent Supreme Court decisions complicate the federal-jurisdiction argument. Murphy v. NCAA, 584 U.S. 453 (2018), struck down the federal Professional and Amateur Sports Protection Act on Tenth Amendment commandeering grounds and is widely read as affirming state primacy over sports wagering. Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), eliminated Chevron deference and held that courts must independently interpret statutory terms, which reduces the weight that lower courts will give to the CFTC’s expansive reading of “swap.” A circuit split arising from the Ninth and Fourth Circuit appeals would make Supreme Court review highly likely within the next one to two years.

State enforcement and the Statute of Anne litigation

Beyond the regulator-driven preemption litigation, two distinct categories of state-law claims against prediction-market operators are now active.

The first category is direct state enforcement: cease-and-desist letters, civil enforcement actions, and (in Arizona) criminal charges. Arizona filed a twenty-count criminal information against KalshiEX LLC on March 17, 2026, alleging unlicensed gambling and election wagering on the 2028 presidential race, the 2026 Arizona gubernatorial race, the 2026 Arizona Secretary of State race, professional and college sports outcomes, and a federal legislative proposition. It is the first criminal action against a CFTC-registered DCM. Civil enforcement and preliminary-injunction proceedings have been pursued by, among others, Nevada, Washington, Massachusetts, New Jersey (prior to the Third Circuit’s adverse ruling), Maryland, Connecticut, Illinois, Ohio, Tennessee, New York, and Wisconsin. The procedural posture varies considerably across states; some are being defended by Kalshi or Robinhood as plaintiffs in federal preemption actions, others as defendants in state court.

The second category is private litigation invoking state-law descendants of the 1710 Statute of Anne (8 Anne c. 14). The original Statute of Anne, enacted under Queen Anne to curb gambling excesses, voided gambling debts and allowed losing parties to sue winners to recover their losses; if the loser failed to sue within three months, a third party could step in and recover treble damages. The statute was widely incorporated into the common law of the American colonies and is now reflected in the gambling-loss-recovery statutes of more than thirty U.S. states. Specific provisions include Kentucky Revised Statutes § 372.020, Massachusetts General Laws ch. 137 § 1, the District of Columbia Code § 16-1702, and analogous provisions in Ohio, Illinois, South Carolina, and Georgia.

A coordinated litigation campaign funded by Veridis Management LLC (Florida-based, CEO Maximillian Amster) has invoked these statutes against Kalshi, Robinhood, Webull, and DraftKings, among others, through Delaware-incorporated LLC plaintiffs with standardized names (Kentucky Gambling Recovery LLC, Illinois Recovery LLC, Ohio Gambling Recovery LLC, DC Gambling Recovery LLC). The campaign was launched in mid-2025 and has expanded continuously. The most recent class action, Roberts v. KalshiEX LLC, was filed on May 11, 2026 in the U.S. District Court for the Western District of Kentucky and seeks recovery of losses for all Kentucky residents who traded sports event contracts on Kalshi, naming as defendants Kalshi Inc., KalshiEX LLC, Kalshi Klear Inc., Kalshi Klear LLC, Kalshi Trading LLC, and the Susquehanna International Group entities that serve as market makers on the platform.

The Statute of Anne strategy presents a substantively distinct attack on prediction markets. Rather than asking a court to enjoin operations on regulatory grounds, these suits seek backward-looking monetary recovery on behalf of losing bettors. The operators’ defenses are largely preemption-based: if CEA Section 2(a)(1)(A) preempts state gambling laws as applied to DCM-listed swaps, then state gambling-loss-recovery statutes built on those gambling-law foundations are also preempted. The operators have not yet obtained a definitive ruling on this question. The outcome depends in part on whether the underlying state gambling law is characterized as substantive regulation (potentially preempted) or as a remedial scheme for harm caused by unlawful conduct (potentially preserved). Several of the Veridis cases are at the motion-to-dismiss stage.

A parallel track of tribal litigation invokes the Indian Gaming Regulatory Act, 25 U.S.C. §§ 2701 et seq., and tribal sovereignty principles. Four New Mexico tribes and pueblos (Pojoaque, Sandia, Isleta, and the Mescalero Apache Tribe) filed suit against Kalshi on May 12, 2026, alleging that prediction-market sports betting on tribal land violates tribal gaming compacts and the IGRA’s regulatory framework. The Ho-Chunk Nation in Wisconsin filed a similar action in August 2025, with a Wisconsin federal court affirming the tribe’s “likelihood of success” on the merits even while denying immediate injunctive relief.

Manipulation and insider trading on prediction markets

Prediction markets are subject to the same anti-fraud and anti-manipulation provisions of the Commodity Exchange Act that apply to other CFTC-regulated derivatives markets. CFTC Rule 180.1, modeled on SEC Rule 10b-5, prohibits fraud and manipulation in connection with swaps and incorporates the misappropriation theory of insider trading developed under the federal securities laws. Under that theory, a person who trades on material nonpublic information in breach of a duty of trust or confidence owed to the source of the information violates the rule. The principal cases are United States v. O’Hagan, 521 U.S. 642 (1997), which established the misappropriation theory; Salman v. United States, 580 U.S. 39 (2016), which reaffirmed it in the tipping context; and United States v. Chow, 993 F.3d 125 (2d Cir. 2021), which held that a non-disclosure agreement creates a duty of trust and confidence sufficient to support liability.

Specifically applicable to government-source information is CEA Section 4c(a)(4), commonly called the “Eddie Murphy rule” (a reference to the 1983 film Trading Places), which prohibits federal government employees from trading on material nonpublic information related to government action. The STOCK Act of 2012, 15 U.S.C. § 78u-1, imposes parallel restrictions on members of Congress and certain other federal officials. CEA Sections 9(d) and (e) prohibit misuse of confidential information by CFTC employees and the employees of exchanges and self-regulatory organizations. The broader anti-fraud and anti-manipulation provisions of CEA Sections 4b, 4c, 6(c), and 9(a) provide additional statutory grounds for prosecution.

On March 31, 2026, CFTC Director of Enforcement David I. Miller delivered remarks at New York University School of Law identifying insider trading in prediction markets as one of the Division’s five top enforcement priorities. Miller stated that the Commission would “aggressively detect, investigate, and, where appropriate, prosecute insider trading in the prediction markets” and addressed what he characterized as a “myth” that insider-trading law does not apply to prediction markets. Importantly for the customer-side practitioner perspective, Miller also identified the limits of the CFTC’s enforcement posture: the Division will pursue cases involving “misappropriated information” in breach of a duty, but will not pursue cases “where there is no clear breach of duty” or trivial cases. The Division views prediction-market exchanges as the “first line of defense” for surveillance and enforcement of marginal cases.

The first U.S. criminal prosecution for insider trading on a prediction market was unsealed in the Southern District of New York on April 23, 2026. United States v. Van Dyke charges U.S. Army Special Forces Master Sergeant Gannon Ken Van Dyke with using classified information about the January 2026 Venezuelan operation that resulted in the capture of President Nicolás Maduro to win approximately $400,000 in profits on Polymarket. The indictment was brought by U.S. Attorney Jay Clayton (a former SEC Chair). Israeli authorities filed parallel charges against a military reservist and one other individual in February 2026 for trading on classified Iran-strike information on Polymarket. A May 2026 New York Times investigation identified more than eighty Polymarket users with suspicious betting patterns across approximately thirty topics dating to 2024, indicating that the universe of potential insider-trading cases is substantially larger than the prosecutions to date.

Operators have implemented surveillance and disciplinary procedures in response to the scrutiny. Kalshi disclosed in February 2026 that it had opened more than two hundred insider-trading investigations with more than a dozen active cases, and entered a Memorandum of Understanding with Major League Baseball for collaborative integrity monitoring. Polymarket published updated rules in March 2026 prohibiting trading on “stolen confidential information” or illegal tips and barring trades by persons in a “position of authority or influence” over the underlying event. The adequacy of platform-level surveillance remains contested, and the gap between operator-level disciplinary action and federal criminal prosecution is the strategic opening for civil customer-side recovery.

Customer-side loss recovery

The customer-side and counterparty-side practitioner question is what avenues are available when a prediction-market participant has lost money as a result of conduct that may have been unlawful: insider trading by a counterparty using misappropriated or classified information, market manipulation through spoofing or wash trading, platform-level supervisory failure, operator misconduct, or the operation of an allegedly unlawful gambling business in violation of state law. Several recovery pathways exist, and the strategic decision among them depends on the specific factual posture.

The federal private right of action under CEA Section 22 (codified at 7 U.S.C. § 25) provides the principal civil-recovery vehicle for fraud and manipulation claims. Section 22 authorizes any person who has suffered actual damages from a CEA violation to bring an action in federal district court against the violator. The scope is narrower than the corresponding Section 10(b) private right of action under the securities laws: Section 22 reaches fraud, manipulation, and certain enumerated violations but is not a general remedy for all CEA infractions. The Lowenstein Sandler analysis of Director Miller’s March 2026 NYU remarks observed the strategic implication directly: where the CFTC declines to pursue manipulation cases lacking a “clear breach of duty,” the private bar may need to bring those cases under Section 22 if there is to be any redress. For counterparties on Polymarket or Kalshi who lost money trading against an undisclosed insider, Section 22 is the natural federal recovery vehicle.

CFTC Reparations under Section 14 of the CEA (7 U.S.C. § 18) and the implementing regulations at 17 C.F.R. Part 12 provide an administrative complaint forum against CFTC-registered firms. Reparations is available where the claimant alleges that a registered firm or registered individual violated the CEA or CFTC rules in a way that caused the claimant’s damages. The statute of limitations is two years from the violation or constructive notice. Reparations proceedings are heard by Judgment Officers at the CFTC, with appellate review by the full Commission and then by the federal courts of appeals. Out-of-pocket damages are the standard measure; punitive damages and most consequential damages are not available. Reparations is most natural for claims against registered intermediaries (FCMs, IBs, brokers) rather than against the DCMs themselves, although operators that hold multiple registrations may be reachable.

NFA arbitration under the NFA Code of Arbitration is available for disputes against CFTC- and NFA-registered Members and Associates — FCMs, IBs, CPOs, CTAs, RFEDs — including disputes arising from prediction-market trading where such an intermediary is involved. The two-year time limit under Section 5 of the Code applies. Direct disputes between a customer and a DCM-only operator like Kalshi or Polymarket US would generally not be arbitrable at NFA, since the DCMs themselves are not Members in the relevant sense; but disputes that pass through an FCM, IB, or affiliated CTA may be. The NFA Arbitration deep-dive page covers the procedural framework in detail.

State-law gambling-loss-recovery actions under Statute of Anne descendants present a distinct customer-side recovery theory. As described above, these statutes generally allow a losing bettor to recover losses directly within a specified window (typically three to six months from the loss) and authorize third-party recovery (often at treble damages) after that window closes. The Veridis Management LLC litigation campaign is testing the viability of the third-party-recovery theory at scale; whether direct losing-bettor recovery is more durable than third-party recovery is one of the open questions. The principal operator defense is preemption under the CEA, which is the same defense that has succeeded against state regulatory enforcement in the Third Circuit and Tennessee but has not yet been ruled on definitively in the loss-recovery context.

Federal RICO claims under 18 U.S.C. § 1962 have been pleaded in some prediction-market cases on the theory that the operator runs an unlawful gambling enterprise generating a pattern of racketeering activity. RICO claims face heightened pleading standards and demanding pattern-of-racketeering and proximate-causation requirements. State consumer-protection statutes — unfair and deceptive acts and practices (UDAP) claims, addiction-targeted-marketing claims, age-verification failure claims — have appeared in several of the recent complaints, including the Kentucky class action and the Washington State Attorney General’s action against Kalshi. Whether these state-law claims survive the same preemption defenses that protect the substantive event-contract listing is presently uncertain.

Strategic cross-forum analysis is consequential. Section 22 federal-court litigation offers broad discovery, jury trial, and the full range of damages but requires litigation against a defendant who may have substantial resources and a willingness to defend aggressively. Reparations is faster and cheaper but limited in scope and damages. NFA arbitration is procedurally informal and tailored to the futures industry but requires an NFA-registered defendant. State Statute-of-Anne actions offer treble damages and the leverage of state-court venue but face the unresolved preemption question. Operators-versus-state-regulator litigation remains heavily federalized through removal practice. Counsel evaluating prediction-market loss claims will need to assess forum, theory, and statute of limitations together at the outset.

Legislative and industry developments

Congress has begun to engage. On March 23, 2026, Senators Adam Schiff (D-CA) and John Curtis (R-UT) introduced the “Prediction Markets Are Gambling Act,” which would amend CEA Section 5c to prohibit CFTC-registered exchanges from listing sports event contracts and casino-style event contracts. Parallel bills (S. 4160, S. 4226, H.R. 7477, H.R. 8123) propose various combinations of substantive prohibitions, savings clauses preserving state authority, and required Government Accountability Office studies. The Ethics in Government Act and STOCK Act amendments under consideration would specifically address government-employee trading on prediction markets. The White House Personnel Office issued internal guidance in 2025 prohibiting White House staff from trading on Iran-war-related markets.

Industry coalitions have formed on both sides. The Coalition for Prediction Markets, launched in December 2025 by Kalshi and Crypto.com, advocates for the federal-regulation-only framework. The American Gaming Association and a new coalition called Gambling Is Not Investing oppose the expansion of prediction markets outside state gaming regulation. The NCAA has formally requested that the CFTC block college sports event contracts. Major League Baseball, the National Hockey League, and Major League Soccer have marketing partnerships with prediction-market operators; the National Football League and the National Basketball Association have not.

Recent developments

Significant developments since mid-2025, in reverse chronological order:

• May 12, 2026 — Four New Mexico tribes and pueblos (Pojoaque, Sandia, Isleta, Mescalero Apache) file suit against Kalshi alleging violation of tribal sovereignty and the Indian Gaming Regulatory Act.
• May 11, 2026 — Kentucky resident files class action against Kalshi in W.D. Ky. (Roberts v. KalshiEX), invoking Kentucky Revised Statutes § 372.020 (state Statute of Anne descendant) and naming Susquehanna International Group entities as market-maker defendants.
• April 23, 2026 — United States v. Van Dyke indictment unsealed in S.D.N.Y. against U.S. Army Special Forces Master Sergeant for using classified information about January 2026 Venezuelan operation to win approximately $400,000 on Polymarket. First U.S. criminal prosecution for insider trading on a prediction market.
• April 7, 2026 — Third Circuit affirms preliminary injunction against New Jersey enforcement of state gambling laws against Kalshi (2-1, Judge Porter writing). First federal appellate ruling on prediction-market preemption.
• March 31, 2026 — CFTC Director of Enforcement David Miller delivers NYU Law speech identifying prediction-market insider trading as a top-five enforcement priority and signaling that the private bar will be expected to bring cases lacking clear breach of duty.
• March 23, 2026 — Senators Schiff (D-CA) and Curtis (R-UT) introduce “Prediction Markets Are Gambling Act” to amend CEA Section 5c.
• March 17, 2026 — Arizona files twenty-count criminal information against KalshiEX LLC alleging illegal gambling business and election wagering. First state criminal action against a CFTC-registered DCM. CFTC subsequently obtains TRO against Arizona enforcement.
• February 19, 2026 — M.D. Tenn. (Judge Trauger) grants Kalshi preliminary injunction holding sports event contracts likely qualify as “swaps” under CEA Section 1a(47); first post-Loper Bright textual analysis of the question.
• February 2026 — CFTC withdraws May 2024 proposed amendment to 17 C.F.R. § 40.11 (which would have expanded “gaming” to include political contests) and Staff Advisory Letter 25-36.
• January 2026 — Suffolk County Superior Court (Massachusetts) grants preliminary injunction against Kalshi; Massachusetts Appeals Court stays the injunction pending appeal.
• December 11, 2025 — CFTC issues no-action letters to Polymarket US, PredictIt, Gemini Titan, and LedgerX/MIAX for specified swap data reporting and recordkeeping obligations.
• October 2025 — Intercontinental Exchange invests $2 billion in Polymarket at an $8 billion valuation; Polymarket completes the QCEX acquisition to relaunch U.S. operations through a CFTC-licensed DCM.
• July 2025 — PredictIt wins final judgment in W.D. Tex. (Clarke v. CFTC); per-trader cap raised to $3,500. Trump administration closes DOJ and CFTC investigations of Polymarket.
• May 5, 2025 — CFTC drops appeal of KalshiEX LLC v. CFTC (D.D.C. September 2024 ruling permitting Kalshi to list congressional control political event contracts).

Frequently asked questions

Framework & regulators · Loss recovery & remedies

How this page connects

Prediction markets sit at the intersection of multiple substantive areas covered elsewhere in this resource center. The CFTC’s jurisdictional framework over derivatives generally is covered in Foundation One (Market Regulation). The supervisory and trading-conduct standards that apply to CFTC-regulated entities, including DCMs, are covered in Foundation Two (Trading Conduct & Supervision). The procedural framework for disputes against CFTC-registered entities, including CFTC Reparations and NFA arbitration, is covered in Foundation Three (Disputes & Enforcement), with deep-dive treatment of NFA Arbitration and FINRA Arbitration. Expert-witness practice in market-structure, manipulation, and damages contexts is covered in Foundation Four (Expert Witness Practice). The CFTC and SEC whistleblower programs, which may be relevant where prediction-market manipulation or insider trading involves reportable violations, are covered in Foundation Five (Whistleblower Programs). The broader regulatory framework for futures, foreign exchange, and trading-conduct rules — including CFTC Rules 180.1 and 180.2 anti-manipulation provisions — is covered in Foundation Six (Futures, FX & Trading Conduct).