Defining Sports Event Contracts
In a prediction market, a user could purchase a contract priced at $0.60 that pays $1 if the team they wager on wins and $0 if they lose. In this scenario, the customer wagers $0.60 and would profit $0.40, as the payout would be $1 minus any platform fees. Purchased contracts will see their value rise and fall as the wagered-on event progresses, allowing traders in these markets to exit their positions before the event concludes. In some cases, the market may close trading once the event begins. Unlike a traditional sportsbook, prediction market platforms that offer sports event contracts operate more like a derivatives market than a sportsbook. On these platforms, though, consumers need to find a taker to buy the other side of their contract, whether that is another person or the platform itself. Therefore, one side purchasing a contract at $0.60 needs the other side to take the other side at $0.40.
The Debate Over Sports Event Contracts
The debate centers on how sports event contracts can be classified under the Commodity Exchange Act (CEA). The online platform Kalshi is currently the only CFTC-regulated prediction contract market exchange offering event contracts, but whether they should be able to offer event contracts on sports outcomes is causing concern among legalized sports gambling regulators across the country.
Kalshi and Sports Event Contracts
As the first federally regulated prediction market, Kalshi has come under the scrutiny of many states offering legalized sports betting. Kalshi offers contracts as financial derivatives under the CFTC’s oversight, but states argue they’re sports gambling, which should fall under their jurisdiction. This is where the whole issue is at a regulatory standstill and why the legal system appears likely to determine which rules will apply to prediction markets offering sports event contracts.
How Regulated Sports Betting Works
Under regulated gambling laws at a traditional sportsbook, a customer would make a $110 bet at -110 odds on a team to win a specific game. The sportsbook takes $110 from the customer and keeps it if the customer is incorrect, or pays the customer back $210, the original $110 plus a $100 profit, if the customer wins. The -110 odds allow them to balance the action when bets are placed on both sides of an event. The goal of the sportsbooks is to take $110 from one customer betting on one team, and another $110 from a customer taking the other team, but then pay out $210 to the winner, which allows them to profit $10 in this scenario.
Why States Are Challenging Sports Event Contracts
Some states offering regulated sports betting have investigated the idea of, or have actually filed lawsuits, injunction requests, or cease-and-desist orders against Kalshi, with the issue now moving through some of those states’ court systems.
States Investigating or Taking Legal Action
States that have investigated the idea of, or taken action, include Arizona, Connecticut, Illinois, Maryland, Massachusetts, Montana, Nevada, New Jersey, New York, Ohio, and Tennessee. The ultimate determination of whether to prohibit these contracts will likely be made by the courts or Congress, which can set clear boundaries for the relationship between federal commodities regulations and state gaming laws.
States’ Concerns Over Lost Revenue
If sports event contracts are prohibited, the platforms offering them will now be direct competitors with sportsbooks, potentially offering lower fees through person-to-person trading. States that offer legalized sports betting can use revenue to further develop their infrastructure, helping fund public projects like education systems and other initiatives to improve their communities and programs. States could lose tax revenue from legalized sports gambling, as event contracts could severely cut into the current income states offering regulated sports gambling are generating through this vehicle.
Concerns Surrounding Sports Event Contracts
A concern about the legality of these contracts is that regulators argue they should be treated as gambling instruments. In traditional sports gambling, a bettor goes to the sportsbook, which accepts their money and pays out their winnings. In the world of sports event contracts, customers trade with each other, and this area needs legal clarification.
If prediction markets are classified as financial derivatives under federal jurisdiction rather than state gambling laws, this could make it easier for them to eliminate regulatory requirements that vary from those of state-licensed sportsbooks. Sports betting is also heavily taxed at the state level, and it’s unknown if these platforms would be taxed as gambling if they are ruled to be financial instruments, which could subject them to different taxation rules.
Consumer Protection Issues
While Kalshi has CFTC regulatory safeguards in place, prediction markets, which are not federally regulated, typically do not offer the same safety nets as state-to-state sportsbooks. Included in this are age requirements or problem gambling help services, to name a few. Another key concern is that match-fixing can tempt athletes, team officials, referees, and others with non-public information to cheat, undermining the fairness of events. The role that insider information could play in this is also a concern for those responsible for regulating it. Allowing these contracts could further push sports betting into unregulated markets such as decentralized platforms or offshore institutions. These scenarios may limit consumer protections even further, which could lead to financial risks and other gambling-related downfalls for those using them.
Regulatory Safeguard Concerns
Regulated state sportsbooks have rules in place that impose know-your-customer requirements and protections that may not apply to these platforms. Ethical matters related to transparency and integrity are at the heart of the debate over restricting them. Another concern is that allowing them doesn’t offer safeguards that have the potential to lead those who use these platforms to addictive gambling, mental health issues, and financial problems.
CFTC Regulatory Challenges
The CFTC’s role is to oversee derivatives markets and protect market participants from fraud and manipulation. The agency now faces new challenges regarding financial instruments in prediction markets, for which it hasn’t decided whether to allow sports-event contracts under existing law. The CFTC faces decisions when regulating these spaces, as these contracts can be considered both gambling and derivative contracts. It is hard to ensure that the rules are being followed in these markets, and the outcomes are uncertain and depend on unpredictable events. There is also pressure to promote products that protect users and follow federal rules, especially in event-based contracts offered to the public.
The CFTC’s Response
On June 10, 2024, the CFTC issued a Notice of Proposed Rulemaking to outline what types of event contracts could fall under the CEA’s oversight and potentially be banned if not consistent with federal law. However, on Feb. 4, 2026, the CFTC withdrew its proposal. As prediction markets and event contracts become more popular, the CFTC could use the rules it has in place regarding contracts deemed derivatives to determine when to prohibit certain products. This will ensure a fair market while keeping participants safe; however, traditional sports betting is outside the CFTC’s jurisdiction and is regulated by each state that legalizes it. Court rulings across the country may determine that gambling-like markets should be barred at the federal level or remain regulated. As the situation moves through the court system, the industry remains in limbo.
The Legal Future of Sports Event Contracts
While the CFTC normally regulates commodities, prediction markets introduce several questions that are not settled under current laws. This case involves multiple factors, including whether Kalshi’s situation falls under federal law and the CFTC’s oversight or is subject to individual state gambling laws.
Prohibiting sports event contracts may push them into unregulated markets, while failing to prohibit them may negatively impact state gaming revenues and tax income. Until legal rulings are issued, this topic will remain debatable, as the question of barring them remains a gray area of the law. With the issue between finance and gaming at the core of the matter, a conclusion on who oversees prohibiting sports event contracts on prediction markets appears to be ultimately decided by the courts.
