JTIP Blog

Introduction

Financial Technology (FinTech) has increasingly made finance and banking accessible for millions of people globally. While FinTech has largely had positive effects, it has also drawn criticism. Examples of this include, but are not limited to, financial surveillance and controversial financial products, such as cryptocurrencies, non-fungible tokens, and buy-now-pay-later.

Another controversial byproduct of FinTech is the proliferation of prediction markets, which has raised numerous legal questions. Prediction markets are platforms that allow users to speculate on the outcome of real-world events. Some of the current major legal issues surrounding the prediction markets are (i) whether states or the federal government have authority over “event contracts”, (ii) market manipulation and insider trading, (iii) what constitutes a gaming event, (iv) liability for third-party services, and (v) consumer protection questions. This blog post will summarize the current status of the first three points.

The lack of clear and defined terms in the prediction market presents an opportunity for legislation to protect consumers and regulate the industry. By becoming well-versed in the intricacies of these legal questions, attorneys and law firms can offer additional value to clients.

What Is a Prediction Market?

The prediction market is a part of the broader scheme of FinTech, also known as Financial Technology, which refers to the use of technology and innovation to provide financial products and services. FinTech has historically been praised for its democratization of financial services and increased access to the finance industry. FinTech provides infrastructure, data analytics, and leverages regulatory matrices that enable the adoption of prediction markets into the mainstream and allow them to function like traditional derivative exchange platforms. Derivatives are financial contracts whose values are derived from the performance of underlying market factors, such as interest rates, currency exchange rates, etc. Prediction markets are platforms that allow users to speculate on the outcome of real-world events across popular culture, weather, sports, economics, politics, and other areas of interest. They function similarly to futures markets for commodities or other financial assets. Some familiar prediction markets are Kalshi, Polymarket, Robinhood, and sportsbooks, such as FanDuel and DraftKings.

According to Forbes, the total volume for the prediction market reached $44 billion in 2025. Sports dominate prediction markets by volume driving flow, meaning it accounts for short-term and high frequency transactions; while politics and economics gain capital commitment, where people hold positions for longer periods of time. Although prediction markets often include sports-related event contracts, they are not subject to the same rules as sportsbooks and, therefore, avoid state regulation and taxes. Prediction markets differentiate themselves from bookmakers and sportsbooks because they only monetize transaction fees, rather than charging a vigorish or betting against the user.

The aforementioned regulatory loopholes have increased scrutiny and visibility on these financial instruments.

The Law on the Issues

State vs. Federal Authority

As it presently stands, the Commodity Futures Trade Commission (CFTC) has authority over event contracts under the Commodity Exchange Act (CEA). An event contract is a derivative contract whose payoff is based on a specified event, occurrence, or value. As of February 2026, the CFTC’s authority has been challenged by more than 36 states, citing public policy reasons. States posit that event contracts are not derivatives, but gambling and therefore should be state-regulated. The CFTC is diametrically opposed to patchwork legislation by the states because, in their opinion, event contracts are derivatives and are already regulated at the federal level. On April 6, 2026, the U.S. Court of Appeals for the Third Circuit affirmed enjoinment against the New Jersey Division of Gaming Enforcement from enforcing a state law against Kalshi’s sports-related event contracts, strengthening the CFTC’s claim that the CEA preempts state law.

There are roughly 20 federal lawsuits where Kalshi is a party. Approximately eight of the lawsuits are from state gambling commissions and Indian tribes accusing the prediction market of operating as an unlicensed sports gambling platform; six of the suits are offensive, where Kalshi is the plaintiff; and the remaining complaints were filed by individuals who argue Kalshi is an illegal service that is worsening gambling addiction. Maryland, Ohio, Nevada, and Massachusetts have proven successful against Kalshi as of early April 2026. Further, the CFTC has sued Arizona, Connecticut and Illinois, seeking to block what it insinuates are unlawful state efforts to regulate the prediction markets.

Market Manipulation and Insider Trading

Market manipulation and insider trading may pose a threat to the prediction markets. Event contracts are not securities in the traditional sense, and therefore are not subject to the anti-fraud provisions of the Securities Exchange Act of 1934, which prohibits trading based on material, non-public information. However, the CFTC has its own anti-manipulation and anti-fraud provisions promulgated under CEA Section 6(c).

In 2025, a Republican gubernatorial candidate for California posted a video of him placing a bet on Kalshi on his own candidacy. Kalshi’s compliance department flagged the transaction, and the candidate acknowledged that he knew the trade was improper and violated the platform’s rules. Kalshi imposed a financial penalty and a five-year suspension. The violation stemmed from his influence over the outcome and his possession of confidential information that enabled him to act in breach of a pre-existing duty of trust and confidence.

Wash selling is another concern. A wash sale occurs when a security is sold at a loss and followed by a repurchase of the same or substantially identical security within 30 days. In prediction markets, wash selling resembles executing trades to falsify volume or manipulate prices, which violates the CFTC’s exchange rules. Wash sales are particularly relevant to tax attorneys because wash selling has important tax implications. However, losses from sales or trades of commodity futures contracts do not apply. This is another example that emphasizes the importance of guidance that clarifies the classification of these financial instruments to more accurately assess the implications of trades and sales.

What Constitutes a Gaming Event

Event contracts are generally types of derivatives that are structured as binary options based on the outcome of events. The existing rules on event contracts are outlined in § 5 of the CEA and CFTC Rule 40.11. These rules explicitly prohibit event contracts that involve enumerated activities, such as terrorism, assassination, war, gaming, and any activity that is unlawful under State or Federal Law (TAWGA). However, gaming is not defined, which is an area of contention as it concerns sports on prediction market platforms. Many states have taken the position that if it looks like sports betting or gambling, then it should not be considered an event contract. The CFTC has proposed to define “gaming” in the new § 40.11(b)(1), and the definition would be consistent with its interpretation of the term in the Nadex Order and the Kalshi Order.

Whether contracts on weather, sports, or politics should be considered event contracts is a topic of considerable debate. The American Gaming Association posed the question pertaining to sports, and the results revealed that four out of five Americans believe that sports-related contracts on prediction markets should be subjected to gambling regulations. In terms of weather and other random topics, the argument is that it serves no public good and that the lack of regulation is contributing to the rise in gambling addiction.

What’s a Safe Bet on Prediction Markets?

The lack of clear and precise oversight and regulatory procedures surrounding prediction markets has resulted in legal pandemonium. Several politicians are proposing legislation to provide guardrails on prediction markets. This includes the “Public Integrity in Financial Prediction Markets Act of 2026,” “Prediction Markets Are Gambling Act,” and the “Event Contract Enforcement Act.” Forbes suggests that some implications of prediction markets on FinTech are: (a) the narrowing of regulatory arbitrage; (b) the value of data and analytics; and (c) the vitality of governance and oversight. The regulatory arbitrage is the biggest source of contention.

The “Public Integrity in Financial Prediction Markets Act of 2026” is a federal bill introduced to prohibit government officials and employees from engaging in “insider trading” on prediction markets. Representatives Blake Moore (R-UT) and Salud Carbajal (D-CA) introduced bipartisan legislation, “The Event Contract Enforcement Act”, to ensure event contracts can continue to serve legitimate business interests while protecting Americans from the safety and national security risks of dangerous or otherwise problematic event contracts. The purpose of the act is to require the CFTC to prohibit event contracts involving TAWGA, echoing the prohibited enumerated activities outlined in Rule 40.11. Another goal is to allow states to opt out of the gaming contract prohibition, which is at the center of the gambling controversy and federal lawsuits. Senators John Curtis (R-UT) and Adam Schiff (D-CA) introduced the “Prediction Markets Are Gambling Act” to prohibit CFTC-registered entities from listing any contract that resembles a sports bet or casino-style game. The bill aims to remove any ambiguity in the CEA that warrants sports betting as an event contract to more closely align with what the senators believe was Congress’ intent.

The future of prediction markets may be in dire straits. There is bipartisan support for stricter oversight of prediction markets. Kalshi is currently facing a class action suit for failure to pay out $54 million in relation to the death of Ayatollah Ali Khamenei, a TAWGA class activity that should have been prohibited. The growth of prediction markets has been fueled by regulatory arbitrage, raising several legal questions. These questions have garnered attention not only from average citizens, but from the executive branch and legislators. Becoming an expert in the issues surrounding prediction markets allows law firms and business entities to remain compliant and presents opportunities for business development.