Regulating the Prediction Market Boom

Prediction markets—which allow participants to buy and sell contracts that may pay out depending on the outcome of predetermined future events—have proliferated in recent years. Platforms such as Kalshi now offer contracts on subjects including economic indicators, congressional control, and sporting events. Although proponents argue that these markets aggregate information and improve forecasting, critics contend that many event contracts closely resemble gambling and raise concerns about market manipulation, election integrity, and consumer protection.

The Commodity Futures Trading Commission (CFTC) has clashed with more than a dozen states over who should regulate these markets. The CFTC contends that it has the authority to regulate event contracts traded on prediction markets, unlike traditional sportsbooks, under the Commodity Exchange Act (CEA) as financial investment products known as derivatives. The agency recently began developing a framework through which certain event contracts may be found illegal if they are contrary to the public interest. The rule could effectively ban event contracts concerning gaming, terrorism, war, assassinations, or acts that are illegal under state or federal law.

State regulators, however, have argued that the CFTC is overreaching and that many event contracts fall within their traditional authority over gambling. They contend that shielding prediction markets from state regulation violates the traditional coequal role of state and federal governance, undermining the states’ traditional power to protect consumers. Some scholars have argued that doing so also threatens tribal sovereignty, since it would let federally regulated platforms sidestep the exclusivity provisions tribes secured under the Indian Gaming Regulatory Act.

The legal fight is playing out in multiple forums at once. Arizona’s attorney general has filed criminal charges against Kalshi. The CFTC sued Arizona, Connecticut, and Illinois to assert its authority over prediction markets. And lawmakers have introduced federal legislation seeking to ban sports betting on prediction markets.

These disputes have forced courts, regulators, and scholars to confront a fundamental question: When does an event contract constitute a derivative rather than a wager? The answer will determine which regulator has jurisdiction and the future of prediction markets in the United States. Although litigation surrounding Kalshi has focused public attention on these questions, the underlying regulatory issues extend well beyond any single platform.

In this week’s Saturday Seminar, scholars examine the legal status of prediction markets, debate the proper scope of the CFTC’s authority, and assess the relationship between commodities regulation and state gambling law. They also consider the risks prediction markets pose to information integrity and public trust as they expand into contested political and social subjects, proposing reforms for regulating event contracts.

• In a forthcoming article in the University of Illinois Law Review, John T. Holden and Matthew Turk of Indiana University’s Kelley School of Business and Marc Edelman of Baruch College argue that sports prediction markets represent “one of the starkest cases of regulatory arbitrage that can be imagined.” They explain that platforms like Kalshi structure sports wagers as derivatives to migrate from state gaming commission oversight to the CFTC’s jurisdiction, thereby avoiding state taxes, licenses, and consumer protection rules. Surveying conflicting district court rulings in Nevada, New Jersey, and Maryland, the authors argue that Congress should allow temporary concurrent jurisdiction between state and federal regulators while gathering empirical evidence on which framework best protects consumers and promotes market integrity.
• In an article in the Boston College Law Review, Alexander Kurtz examines whether political prediction markets are legal under the CEA’s “special rule” for event contracts, which allows the CFTC to review contracts that “involve” gaming, unlawful activity, or “other similar activity” contrary to the public interest. He concludes that both sides of Kalshi’s lawsuit against the CFTC have reasoned positions: The statute’s plain language appears to grant the CFTC broad review authority, but that reading produces the absurd result of allowing the agency to review all event contracts. Kurtz proposes revised statutory language that would narrow the agency’s authority and require it to consider prediction markets’ informational value when conducting public-interest reviews.
• In a recent article in the Boston College Law Review, Karl Lockhart of DePaul University, argues that the CFTC has failed to differentiate investment products from gambling activities. Lockhart finds that cryptocurrencies and futures markets resemble prediction market contracts, as both activities entail risk and research can impact their performance. Rather than relying on past forms of investment-gambling differentiation, including time horizons and underlying assets, Lockhart recommends that the CFTC consider whether an activity reallocates the user’s risk to determine whether it is gambling. Using this regulatory framework, he predicts that event contracts would be considered investments while games of skill and most cryptocurrencies would remain as gambling activities.
• In a recent publication from the MacEachen Institute for Public Policy and Governance, Elliot Goodell Ugalde of Queen’s University argues that prediction markets can erode information integrity and diminish democratic legitimacy. The author explains that prediction market contract settlements often rely upon the statements of government officials and journalists. Ugalde asserts that the specific words an official uses to describe an event or controversy determine whether a user’s prediction was accurate. He draws attention to a recent incident where dissatisfied prediction market users threatened a journalist to make him revise his description of a missile strike to match more closely their predictions. Ugalde fears that similar occurrences may incentivize government actors to share misinformation.
• In an article in the University of Chicago Business Law Review, Ilya Beylin of Seton Hall Law argues that many event contracts now fall outside the traditional purposes of the CFTC’s derivatives regulation. He traces a “step-by-step drift” in event contracts that the agency has authorized, starting with agricultural futures and arriving at contracts on Taylor Swift albums and Bill Ackman’s tweets. He argues that this expansion displaces state gambling regulation without sufficient statutory justification. Beylin proposes that the CFTC invoke Section 3 of the CEA to delist event contracts that lack meaningful hedging or pricing uses, returning them to the purview of state law.
• In a National Bureau of Economic Research working paper, Federal Reserve Board of Governors advisor Anthony Diercks, Northwestern University PhD candidate Jared Dean Katz, and Johns Hopkins University’s Jonathan H. Wright evaluate whether Kalshi markets accurately forecast macroeconomic outcomes. They find that Kalshi’s forecasts perform comparably to established benchmarks—such as expert surveys and established derivatives markets—and in some cases better, including a “perfect forecast record” on Federal Reserve rate decisions. The authors emphasize that Kalshi uniquely provides probability distributions for variables like GDP growth, unemployment, and core inflation, for which no other market-based forecasts have historically existed. The Diercks team suggests that as these markets mature, their potential to enhance “real-time policy analysis and academic research” will grow.