What sets Prediction Markets vs. Traditional Sportbooks apart?
The main difference between prediction market platforms and regulated sportsbooks is that in sportsbooks, the operator sets the odds, accepts the wagers, and assumes the financial risks of the event’s outcome. In prediction markets, contracts tied to these events are bought and sold, and prices fluctuate based on supply and demand, with the platform earning revenue from transaction fees rather than the event’s outcome.
For example, rather than placing a $100 bet at -110 odds on a team to win at a traditional sportsbook, a prediction market user could purchase a contract priced at 70 cents that pays $1 if the team wins and $0 if they lose. Under this system, the value of purchased contracts will rise and fall while the event is in progress, allowing traders to exit their positions before its conclusion. This market-driven structure introduces a trading strategy unlike traditional sportsbooks and operates more like a derivatives market than a sportsbook.
Wagers or Swaps? Breaking Down The Legal Nature of Sports Event Contracts
Some prediction market operators are arguing that their sports event contracts fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC), the independent agency responsible for regulating United States derivative markets, including futures and swaps. The CFTC’s objective is to protect its participants from fraud and manipulation and to promote market integrity. A “swap” under these terms is viewed as a financial contract in which two parties agree to exchange money based on certain terms and contingencies. The prediction market operators offering sports event contracts are arguing that these types of “swaps” offered to their customers should be viewed as part of the regulated derivatives market if those that run them comply with CFTC rules. However, those who oppose this viewpoint believe that when the event in question is a sports contest, it should be viewed as a “bet” rather than a “swap”.
The Growing Divide in The Legal System Between Federal and State Authority
There is now a divide between federal and state authorities regarding the legalities of sports gambling, as established by the court’s 2018 Murphy v. NCAA ruling. State gaming regulators enforce age restrictions, oversee licensing, and protect consumers with responsible gambling tools, including problem gambling tools, to name a few. Prediction markets that offer sports event contracts do not comply with these regulations and are not required to comply with local gaming laws, which could undermine state regulatory systems and erode consumer protections developed over the past eight years.
Compliance Crackdowns and State Government Litigation
Many states are now seeking to ban sports event contracts on prediction market platforms and have taken these matters to court. In Massachusetts, sports gambling regulators have restricted sports event contracts due to licensing and their inability to comply with the state’s gambling laws, and have banned Kalshi until it gets a state license. Connecticut issued cease-and-desist orders to Kalshi, Crypto.com, and other sports prediction market providers for failing to meet age and safety regulations. Maryland and Arizona have also issued cease-and-desist orders to prediction markets, while New Jersey was granted a preliminary injunction against Kalshi based on CFTC preemption arguments. New York has proposed a bill that would stop prediction markets from offering sports event contracts, and Attorney General Letitia James has proposed fining them $1 million per day for each day they continue to operate. Nevada’s denial of sports event contracts on prediction markets has reached the Ninth Circuit Court of Appeals as the state continues its pursuit of banning Kalshi in the state. The courts have ruled against the operator regulating in the state, escalating the conflict between state and federal regulators regarding the legality of prediction markets.
Tennessee’s Key Federal Court Victory
However, a major win for Kalshi occurred in Tennessee, where a federal judge issued a preliminary injunction halting the state’s enforcement of its gambling laws against the prediction market operator and its sports event contracts. The federal judge ruled that the contracts are likely to be deemed “swaps”. The ruling means such contracts will be exclusively under the jurisdiction of the CFTC, thereby bringing them within federal authority. This means that the state of Tennessee’s enforcement of its laws against Kalshi will be put on hold, at least for now, while the case is still ongoing. This ruling is favorable to Kalshi, as it strengthens its argument that event-based prediction contracts should be governed by federal commodities laws rather than state gaming laws.
Consumer Protection Priorities vs. Tax Revenue Growth
Revenue is a significant factor driving resistance from most states against prediction platforms offering sports event contracts. According to the United States Census Bureau, sports betting tax revenues have exploded since legalization in 2018, jumping 382% from $190 million in the third quarter of 2021 (when data first began to be collected) to $917 million in the second quarter of 2025. In some states, tax revenues from sports betting are used for education, infrastructure, and responsible gaming initiatives. There could be a decrease in tax revenues if betting is conducted outside regulated systems. Consumer protection is another factor, as prediction markets that offer sports event contracts should comply with know-your-customer, age verification, location verification, anti-money laundering, and responsible gaming rules. Advocates of prediction markets argue that CFTC regulation provides similar consumer protections, such as requiring exchanges to register, report, monitor, and take steps to secure against manipulation.
What The Future of Sports Betting Regulations May Look Like
As 2026 progresses, the legality of sports event contracts on prediction markets will remain a question. The ongoing lawsuits and regulatory cases may lead higher courts to rule on how federal commodities laws intersect with state laws governing sports betting. This journey could lead to the Supreme Court, once again, determining the course of sports betting in the United States. The potential is great: if CFTC regulations regarding sports event contracts were clear and nationwide, prediction markets could explode with a standardized product available across the country, even if state laws conflict. This could lead traditional sportsbooks to adopt exchange-style models. However, if state laws determine that states are the primary authority over products related to sports outcomes, prediction markets may be required to obtain state-by-state licensing, as DraftKings and FanDuel do.
An Industry in Transition and What the Future Holds
One thing is certain: the sports betting world is evolving rapidly. Tech, consumer demand, and money are changing how consumers wager on sporting events. Whether through sportsbooks or prediction markets, consumers want to be able to join in. The question is, will prediction markets become a way for consumers to join in, or will they change the way the rules are structured? The issues of power, consumers, and state revenues are all tied together, and the answer will determine how sports betting is structured in the United States.
