Are Prediction Markets Legal? Regulation Explained

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.

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.

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.

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.

Real-World Example: Polymarket

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.

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.