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Prediction Markets Face Legal Disputes Over State and Federal Regulation
Prediction markets, platforms where users bet on event outcomes, have grown rapidly and now attract millions of participants. Legal challenges center on whether states or the federal government, through the Commodity Futures Trading Commission, should regulate these markets, particularly those involving sports outcomes.
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Prediction markets allow users to place bets on the occurrence or non-occurrence of various events. Platforms such as Kalshi and Polymarket have seen significant growth, drawing millions of participants. These markets cover topics ranging from sports outcomes to awards shows and financial indices.
, featuring multiple screens to display market activities to passersby. Revenues for these platforms primarily derive from predictions on sports events. This has led to disputes, as states regulate sports gambling and derive income from licensing operators like DraftKings and FanDuel.
Controversies surrounding prediction markets include the participation of 18-year-olds, despite gambling age restrictions of 21 in many jurisdictions. Other issues involve potential manipulation, insider trading in predictions, and bets on sensitive topics such as assassinations or war elements. A central legal question is whether states or the federal government holds regulatory authority.
States have challenged the platforms' claim that the Commodity Futures Trading Commission (CFTC) provides exclusive oversight.
The CFTC regulates derivative contracts, including event contracts or swap contracts related to event outcomes. However, courts have ruled in several cases that Congress did not authorize federal preemption over state regulation for prediction markets. To date, nine court decisions have favored states, while two have favored the platforms.
These rulings stem from contexts similar to sports gambling, which the Supreme Court has deemed a state-regulated activity. The split in decisions may lead to appeals in federal circuit courts.
state efforts to enjoin prediction markets from operating within their borders could prompt emergency appeals.
U.S. Supreme Court on federal versus state jurisdiction. Separately, questions arise about whether non-sports predictions fall under federal preemption. The CFTC has initiated a rulemaking process but has not issued final rules on prediction markets.
