Prediction Markets Collide With Sports Law and Exchange Power

Prediction markets are rapidly expanding in the United States, but their growth has sparked a complex legal battle involving state gambling laws, federal derivatives regulation, and competition among exchanges.

Legal Actions and Regulatory Responses

New York sued Kalshi on July 31, seeking over $36 billion in damages and an injunction against nationwide event contracts. The CFTC invoked emergency authority on August 11 after Kalshi reported a market emergency, arguing that federally regulated derivatives require uniform national treatment. The New York City Council opened an investigation on August 12 into the marketing practices of several prediction‑market platforms, including Polymarket, Kalshi, Coinbase and Gemini Titan, focusing on allegations of targeting young users, influencer marketing and misleading promotions.

Federal vs. State Jurisdiction

The CFTC’s Product‑Specific Legal Boundary gives it authority over designated contract markets, while state gambling statutes govern sports betting. Court decisions are split: the Third Circuit upheld federal preemption in Kalshi’s dispute with New Jersey, whereas courts in Nevada, Maryland and Ohio allowed state enforcement actions to continue. A Tennessee court also ruled in Kalshi’s favor, highlighting divergent judicial interpretations across states.

Industry Perspectives

Retail Protection and Education

Fernando Lillo Aranda, CMO of Zoomex, emphasizes transparency, fair market design and clear risk disclosure as the primary means to protect retail participants. He notes that markets tied to payroll, inflation or commodity prices serve risk‑management purposes, whereas sports contracts are primarily entertainment‑driven and carry manipulation risks.

Exchange Competition

Federico Variola, CEO of Phemex, points out that control over event‑based contracts and perpetual futures is highly lucrative. Established players such as CME, Kalshi and Coinbase compete with newer and decentralized platforms like Hyperliquid and Lighter. CME reported more than 100 million event‑contract trades within eight weeks of launch and has sued the CFTC over approvals that expanded access to competing products.

Future Regulatory Outlook

Regulators are expected to adopt product‑specific rules, including settlement standards, market‑surveillance requirements and consumer‑protection measures tailored to each contract type. The classification of sports‑related prediction markets will be pivotal in shaping the balance between federal oversight and state gambling authority.