In August 2025, the two leading U.S. prediction market platforms processed a combined $1 billion in monthly transaction volume. By July 2026, that figure had climbed to nearly $46 billion, according to The Block Prediction Market Dashboard. That growth reflects a rapid transformation as prediction markets have moved from academic forecasting experiments, such as the Iowa Electronic Markets, to major financial platforms, including Polymarket and Kalshi.
The transformation has produced an unresolved legal question: When an event contract functions primarily as a sports wager, should it receive the same federal treatment as a contract designed to generate economic information or hedge financial risk?
From Information Markets to Sports Wagering
The original justification for prediction markets was largely informational. Market prices aggregate dispersed information and produce probabilistic estimates of future events. That rationale is particularly strong for contracts involving inflation, interest rates, employment, corporate earnings, and other economic variables. A company may use such a market to hedge an identifiable risk, while policymakers and investors may use price discovery as an additional forecasting signal.
Sports contracts present a different case. A contract paying $100 if a particular team wins a game may have the same structure as a contract paying $100 if inflation exceeds a specified level. However, the economic functions can be quite different. The former may be primarily recreational wagering, while the latter can generate information relevant to economic decision-making.
That distinction matters because sports contracts on Kalshi now represent 80% of prediction market activity. As these platforms have become mass-market venues, their economic identity has grown and shifted (Kalshi was valued at $22 billion after a May 2026 financing round). The question is whether their legal classification should also shift. This question sits at the heart of a broader policy debate: whether these markets are genuinely “derivatives or wagers,” which is a distinction that regulators and courts have yet to resolve with clarity.
The Emerging Preemption Conflict
The Commodity Exchange Act (CEA) gives the Commodity Futures Trading Commission (CFTC) broad authority over derivatives markets. Section 5c(c)(5)(C) also authorizes the agency to prohibit certain event contracts involving gaming and other enumerated activities when they are contrary to the public interest. In June 2026, the CFTC proposed amendments to Regulation 40.11 establishing a framework for making those public-interest determinations. The proposal recognizes that event contracts can implicate both financial market regulation and activities traditionally regulated by the states.
The courts are now confronting the related question of preemption. In KalshiEX LLC v. Flaherty, the U.S. Court of Appeals for the Third Circuit held in April 2026 that Kalshi was likely to prevail in challenging New Jersey’s attempt to regulate its sports event contracts. The court concluded, at the preliminary-injunction stage, that the CEA likely preempted New Jersey law as applied to those contracts.
The decision is important, but it should not be mistaken for the final word. Related litigation in the Sixth and Ninth circuits raises similar questions, while the CFTC continues to defend federal jurisdiction. The competing positions are straightforward: The CFTC and prediction-market operators emphasize Congress’ allocation of derivatives regulation to the federal government, while the states emphasize their traditional authority to regulate gambling.
Why Murphy Matters
The preemption question cannot be resolved without confronting Murphy v. National Collegiate Athletic Association, in which the Supreme Court invalidated the federal prohibition on state authorization of sports gambling. Murphy emphasized the constitutional limits on Congress directing state governments in an area traditionally governed by state law.
Prediction markets present a different statutory mechanism because the CEA can preempt conflicting state law when Congress has validly exercised federal authority. The issue, therefore, is not whether states possess general immunity from federal financial regulation. They plainly do not.
The harder question is whether Congress intended the CEA to occupy the field when the regulated activity is fundamentally recreational wagering rather than financial risk transfer or price discovery. That distinction is critical. Federal preemption is easier to justify when an event contract functions as a financial instrument. It is harder to justify when federal regulation effectively creates a nationwide sports betting regime without an explicit congressional decision to displace the states’ traditional authority over gambling. The doctrinal mechanism is the presumption against preemption that governs fields of traditional state concern—a federalism clear-statement principle under which the CEA’s exclusive-jurisdiction clause should not be read to displace state gambling law absent an unmistakable congressional directive.
A Functional Approach
A better approach would distinguish between event contracts according to their economic function, which is an idea that has gained traction even within the prediction market industry itself. A recent CLS Blue Sky post by Laufer and Saad-Diniz, for example, proposes “social impact prediction (SIP) markets” designed to generate forward-looking signals about corporate sustainability commitments. Their argument underscores a point that regulators have been slow to accept, that the same contractual form can serve fundamentally different purposes.
Under a functional framework, the regulatory treatment would turn on what the market actually does and not on what the contract is called.
Information and financial markets. Contracts involving macroeconomic indicators, financial variables, corporate events, and other economically significant outcomes should remain subject to federal oversight. These markets can provide useful information and facilitate risk management. Federal surveillance and market-integrity requirements are appropriate.
Recreational wagering markets. When the principal purpose of a contract is wagering on sports or entertainment rather than information aggregation or financial hedging, state gaming regulation or a coordinated federal-state framework may be more appropriate.
This functional approach would not require abandoning federal regulation. It would require recognizing that identical mechanics do not necessarily produce identical economic functions. The CFTC’s own June 2026 proposal recognizes that event contracts serve different functions. It lists economic and financial indicators as categories that would generally fall outside the public-interest prohibition. Yet the proposal stops short of a true functional test because it would also largely permit broad sports-outcome contracts under federal jurisdiction, treating them as not contrary to the public interest. That moves in the opposite direction from the approach urged here. The agency should go further and ask whether a contract’s dominant economic function is wagering and acknowledge that sports contracts belong in a different regulatory lane altogether.
The Question for Regulators
The rapid growth of prediction markets has created a temptation to treat all event contracts alike because the contracts share similar technical and legal structures. But identical mechanics do not necessarily produce identical economic functions.
The more useful question is therefore not whether a contract is labeled a “prediction market” or an “event contract.” It is what the market actually does.
If prediction markets generate economically valuable information and facilitate financial risk transfer, federal derivatives regulation has a strong justification. If they function primarily as mass-market sportsbooks, the case for federal preemption of state gambling law becomes weaker.
The CFTC’s rulemaking and the emerging litigation provide an opportunity to establish that distinction. The future of prediction markets may ultimately depend not on choosing between federal and state regulation, but on recognizing that financial information markets and recreational wagering markets are not the same thing and should not necessarily be regulated as though they are.
David Krause is an emeritus associate professor of finance at Marquette University.