What Are Prediction Markets?
A prediction market is a trading platform where participants buy and sell contracts tied to the outcome of future events. Rather than trading shares in a company or barrels of crude oil, users trade on questions such as "Which party will control Congress?" or "Will the Federal Reserve cut rates this quarter?"
Contracts typically pay out a fixed amount if the predicted outcome occurs, and nothing if it does not. This binary structure makes prediction markets useful for aggregating collective intelligence about future events, but it also places them squarely under financial regulation in most jurisdictions.
The key difference between prediction markets and polling is financial accountability. Prices on a prediction market reflect real capital at risk, which gives the data a different weight than a survey respondent's casual opinion.
Key Takeaways
- In the US, prediction markets must register with the CFTC as a designated contract market (DCM) to operate legally. Very few platforms have completed this process.
- Kalshi became the first CFTC-regulated prediction market for event contracts in 2020. A 2024 court ruling confirmed its right to offer election contracts after the CFTC tried to block them.
- Polymarket, after paying a $1.4 million CFTC fine in 2022 for operating without registration, received full DCM designation in November 2025 and relaunched for US users.
- Internationally, prediction markets fall under different frameworks: financial regulation in the EU and UK, gambling law in some countries, and outright prohibition in others.
- A new regulatory frontier is the conflict between federal CFTC jurisdiction and state-level gaming laws, with several states challenging prediction markets operating within their borders.
How Prediction Markets Are Regulated in the US
The CFTC's Role and the Event Contract Framework
The Commodity Futures Trading Commission is the primary federal regulator for prediction markets in the United States. Under the Commodity Exchange Act (CEA), any platform offering binary contracts tied to real-world events must register as a designated contract market or obtain explicit no-action relief from the CFTC.
The CFTC classifies these products as "event contracts." The agency holds broad authority to prohibit event contracts it determines are contrary to the public interest, including those involving activity that is unlawful under state or federal law, or those involving gaming or terrorism. This authority has been the central point of contention between regulators and prediction market operators.
Event contracts are distinct from traditional futures contracts. If you are familiar with how futures trading or a futures contract works, event contracts follow a similar binary settlement mechanic, but the underlying is a real-world event rather than a commodity or financial instrument.
What It Takes to Operate Legally
For a prediction market to operate legally in the United States, it must meet one of the following conditions:
- Register as a DCM with the CFTC and receive specific approval for each category of contracts offered.
- Register as a Swap Execution Facility (SEF), applicable for certain contract structures classified as swaps under the CEA.
- Obtain a CFTC no-action letter permitting limited operations while formal registration is in process.
DCM registration is rigorous. A platform must demonstrate that its contracts serve a legitimate economic purpose, maintain robust market surveillance systems, and comply with know-your-customer (KYC) and anti-money-laundering (AML) requirements. Platforms that skip this process and accept US users do so illegally under the CEA, as Polymarket discovered in 2022.
The Kalshi Case: Setting the Precedent
Kalshi became the first platform to receive CFTC DCM designation specifically for event contracts in 2020. On June 12, 2023, the company self-certified "Congressional Control Contracts" that allowed users to trade on which party would control the US House and Senate after the 2024 elections. On September 22, 2023, the CFTC issued a formal order disapproving those contracts, ruling that they involved gaming and activity unlawful under state law.
Kalshi sued under the Administrative Procedure Act, arguing the CFTC's determination was arbitrary and capricious. On September 6, 2024, the US District Court for the District of Columbia ruled in Kalshi's favor, finding that the CFTC had exceeded its statutory authority and that the contracts did not constitute gaming. The CFTC appealed and sought an emergency stay, but the DC Circuit Court of Appeals rejected that stay in October 2024, allowing Kalshi to proceed with election markets. The CFTC dropped its appeal entirely in May 2025 after a change in administration.
The ruling established a clear legal standard: the CFTC cannot prohibit event contracts simply because they touch on politically sensitive topics. It must demonstrate specific, concrete harm within the statutory framework of the Commodity Exchange Act.
Jurisdictional Differences Around the World
European Union and United Kingdom
The EU does not apply a single unified framework to prediction markets. Depending on how a platform structures its contracts, products may fall under the Markets in Financial Instruments Directive II (MiFID II) as a financial instrument, or under national gambling regulations. Platforms operating across multiple EU member states must conduct individual regulatory assessments in each jurisdiction before launching.
In the UK, the Financial Conduct Authority (FCA) took a firm position on binary options in 2019, issuing a permanent ban on retail binary options sales. UK-facing platforms must either be FCA-authorised financial services firms or demonstrate that their products fall outside the definition of a financial instrument under the Financial Services and Markets Act. In practice, most prediction market operators avoid direct UK retail access without proper authorisation.
The Offshore Model and Why It Has Limits
For years, platforms operating outside the US used offshore incorporation and geofencing to serve global users while avoiding CFTC registration. Polymarket ran this model from 2022 to 2025, operating internationally after its CFTC settlement forced it to block US users.
The core regulatory principle is clear: offshore incorporation does not protect a platform from CFTC jurisdiction if it has actively solicited or served US users. The 2022 Polymarket enforcement action established this precisely. Operating an unregistered facility for US users violates the CEA regardless of where the corporate entity is registered.
The offshore model is also not a safe harbour for individual US users. Accessing an unregistered prediction market as a US person constitutes participation in a non-compliant derivatives market under the CEA, even when a platform does not actively enforce geofencing on its end.
The Emerging Conflict: Federal vs. State Jurisdiction
With both Kalshi and Polymarket now operating as CFTC-regulated DCMs, the regulatory debate has shifted to a new battleground: the tension between federal commodity law and state-level gaming regulations.
Since January 2025, Kalshi has offered event contracts on sports outcomes. Several states, including Nevada, New Jersey, and Maryland, have responded by issuing cease-and-desist letters, arguing that contracts on sporting outcomes constitute sports betting under state law and require a state gaming license, regardless of CFTC registration.
In April 2026, the US Court of Appeals for the Third Circuit ruled 2-1 in Kalshi's favor against New Jersey, holding that the CFTC holds exclusive jurisdiction over prediction markets and that the Commodity Exchange Act preempts state gaming law. That appellate decision is the strongest legal endorsement yet of the federal preemption argument.
The broader picture, however, remains contested. A Nevada district court initially granted an injunction against Kalshi in April 2025, then vacated it in November 2025. Maryland refused to grant an injunction at all, putting different federal courts on different tracks. The Third Circuit ruling is authoritative within its jurisdiction, but with courts reaching different conclusions across the country, the question is unlikely to be fully resolved without further appellate review or Supreme Court intervention.
Real-World Example: Polymarket's Path from Fine to Full US Approval
Polymarket's regulatory history illustrates exactly what happens when a prediction market serves US users without proper registration, and what the path back to legal status requires.
Polymarket launched in June 2020 as a blockchain-powered prediction market. By January 2022, the CFTC had charged the company with operating an unregistered facility for event-based binary options, citing more than 900 markets offered to US users. Polymarket paid a $1.4 million civil penalty, agreed to wind down non-compliant markets, and blocked all US access.
Rather than exit permanently, the company rebuilt its compliance infrastructure over the following years. It hired a former CFTC commissioner as advisory board chair, overhauled its internal compliance team, and eventually acquired QCEX, a CFTC-registered exchange and clearinghouse. In November 2025, the CFTC issued an Amended Order of Designation granting Polymarket full DCM status. By December 2025, the platform had relaunched for US users under federal oversight through registered Futures Commission Merchants.
The arc proves that the legal path exists in the US. It is expensive and takes years, but platforms willing to engage with the regulatory process can operate in the world's largest financial market.
Are Prediction Markets the Same as Sports Betting?
No, but the boundary is actively contested. The legal distinction comes down to which regulatory framework applies to the contract in question.
Sports betting in the US is regulated at the state level, following the Supreme Court's 2018 ruling in Murphy v. NCAA, which struck down the federal Professional and Amateur Sports Protection Act and opened the door for state-by-state legalization. Prediction markets, by contrast, fall under federal CFTC jurisdiction when structured as commodity event contracts.
The practical difference is significant for operators. A sports betting firm must obtain a separate license in every state where it accepts wagers. A prediction market with CFTC DCM designation theoretically operates under a single federal license across all 50 states. The ongoing state-level challenges to Kalshi are testing whether that federal designation truly preempts state gaming law, or whether it creates only a parallel compliance obligation on top of existing state requirements.
The Bottom Line
Prediction markets have moved from a regulatory grey area into a defined, if still-evolving, legal space. In the United States, CFTC DCM designation is the gateway to legal operation, and both Kalshi and Polymarket now hold that status. The Kalshi court victory in 2024 confirmed that politically sensitive event contracts are permissible under the Commodity Exchange Act, and Polymarket's return to the US in late 2025 shows that even platforms with an enforcement history can earn compliant status through the right steps. The next legal frontier is the federal-versus-state conflict over sports contracts, which will define how broadly CFTC authority can preempt state gaming law.
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