Federal and state regulation of prediction markets, lawsuits, and jurisdiction fights between CFTC/SEC and states

US Regulation & Legal Battles

The prediction market sector’s rapid growth throughout 2026 continues unabated, now firmly entrenched as a mainstream venue for trading on political, corporate, and social events. Weekly trading volumes have consistently surpassed $100 million, accompanied by over 38 million weekly user interactions, underscoring the robust consumer appetite for these markets. Notably, the recent State of the Union address attracted more than $12 million in wagers, illustrating the sector’s expanding cultural and political footprint.

Yet, this growth unfolds amid a deepening and increasingly complex regulatory and political maelstrom. The sector remains caught in a high-stakes jurisdictional struggle between federal agencies, a surge of state and tribal enforcement actions, intensifying congressional scrutiny on content, and a wave of platform-driven compliance and moderation initiatives. These dynamics are reshaping how prediction markets operate, innovate, and navigate legal risks.

Federal-State-Tribal Jurisdictional Battle Intensifies

The core regulatory conflict persists between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), each asserting competing claims over prediction market oversight.

CFTC Pushes for Federal Preemption
Building on its 2025 Tennessee federal court victory affirming event contracts as swaps under the Commodity Exchange Act (CEA), the CFTC, led by Chair Michael Selig, continues to advocate for a uniform federal regulatory framework. In recent congressional testimony, Selig emphasized the need to avoid a “patchwork of inconsistent and conflicting state gambling laws” that could undermine market integrity and accessibility. The CFTC’s Innovation Advisory Committee has expanded its membership to include specialists in blockchain, AI, and fintech, signaling an active effort to integrate emerging technologies while reinforcing federal primacy.
SEC Targets Securities-Like Prediction Instruments
Under Chair Gary Gensler, the SEC has escalated enforcement against prediction market products it deems securities-like, especially those linked to crypto or hybrid instruments such as Bitwise’s “PredictionShares” ETFs. The SEC stresses rigorous disclosure, registration, and investor protection requirements. An SEC spokesperson recently remarked, “Investor protection remains our guiding principle as we navigate these complex new instruments,” highlighting the agency’s intent to reshape the sector through aggressive rulemaking and enforcement.
State and Tribal Authorities Step Up Enforcement
States and tribal regulators have intensified their jurisdictional assertions, challenging federal oversight claims and applying local gambling statutes. Landmark lawsuits such as Nevada v. Kalshi and Massachusetts v. Polymarket directly confront federal jurisdiction, with outcomes expected to set critical legal precedents. Tribal entities like the Mohegan Tribal Gaming Authority have ramped up enforcement against unlicensed operators on tribal lands, invoking sovereignty and gaming exclusivity.

Legislative initiatives in states like Nevada and Maryland further reinforce local authority. Nevada Representative Dina Titus has been vocal in advocating for stronger state control over sports-related prediction contracts, with warnings issued to licensed sportsbooks threatening license revocation if they facilitate unregulated prediction market participation. This multi-layered enforcement environment poses significant compliance challenges for operators.

Heightened Political and Content Moderation Pressures

Political intervention around content governance has surged, with prominent senators pressing the CFTC to clamp down on contracts tied to ethically sensitive or potentially harmful events.

Congressional Calls for Stricter Oversight on ‘Problematic Topics’
A bipartisan group of senators recently sent letters urging the CFTC to impose tighter controls on prediction markets featuring contracts related to death, disease outbreaks, and other socially fraught events. The letters emphasized the need to “rein in prediction markets tied to harmful or exploitative event categories” to protect consumers and minimize societal harm.
Platforms Respond with Aggressive Moderation and Enforcement
Leading prediction market operators have ramped up moderation and compliance efforts. For example, Kalshi publicly disclosed suspending two users for insider trading violations and notably banned a former California gubernatorial candidate for betting on his own race—an unprecedented enforcement against a U.S. politician. Additionally, Kalshi has blocked politically connected individuals, including an ally of Representative Eric Swalwell, from wagering on sensitive political events such as the California governor’s race.

These measures reflect a growing awareness that content moderation and legal risk mitigation are increasingly intertwined, with platforms proactively addressing regulatory and reputational risks.

Market Growth and Mainstreaming: Milestones and Data

The sector’s expansion is evident not only in aggregate metrics but also in specific event-driven engagement:

Sustained Weekly Volumes and User Engagement
Weekly trading volumes remain above $100 million, with over 38 million weekly interactions, confirming prediction markets as a mainstream financial and political engagement tool.
Political Event Betting Surges
The 2026 State of the Union address drew more than $12 million in wagers, highlighting growing consumer interest in politically significant events and signaling prediction markets’ integration into broader political discourse.

International Expansion Amid Regulatory Challenges

Operators continue seeking growth opportunities beyond U.S. borders, though regulatory responses vary widely.

Brazil Emerges as a Key Growth Market
Polymarket and others have launched services in Brazil, capitalizing on favorable regulatory environments and strong consumer interest. These moves represent strategic diversification amid U.S. regulatory uncertainty.
European Regulatory Pushback
Conversely, the Dutch financial regulator formally banned Polymarket’s operations in the Netherlands, citing unlicensed financial services and consumer protection concerns. This ban exemplifies increasing European skepticism toward blockchain-enabled prediction markets and underscores significant challenges for cross-border expansion.

Industry Adaptations: Compliance, Innovation, and Operational Flexibility

Faced with heightened regulatory complexity and political pressures, prediction market operators are evolving on multiple fronts:

Increased Investment in Compliance
Platforms are expanding legal and compliance teams, implementing advanced monitoring for insider trading, jurisdiction-specific product segmentation, and politically sensitive user restrictions.
Product Diversification and Segmentation
Operators are broadening contract offerings beyond politics and sports, including corporate events (e.g., OpenAI IPO timelines) and geopolitical outcomes, while tailoring offerings to comply with differing federal, state, and tribal rules.
Offshore and Hybrid Operational Structures
Some platforms are exploring offshore bases or hybrid models to balance regulatory compliance with market access and risk mitigation.
DraftKings’ Strategic Integration
DraftKings is increasingly integrating prediction market features into its established sportsbook platform, aiming to capture sector growth within a familiar regulatory framework and reduce legal exposure.

Near-Term Catalysts to Watch

Several impending developments will critically shape the sector’s regulatory and operational landscape:

Court Decisions in Nevada v. Kalshi and Massachusetts v. Polymarket
These cases will be pivotal in delineating the boundaries between federal derivatives law and state gambling statutes, potentially setting enduring jurisdictional precedents.
SEC Rulemaking on Securities-Like Prediction Market Products
Anticipated comprehensive regulatory frameworks will impose new disclosure, registration, and operational requirements, significantly influencing product design and market structure.
CFTC Innovation Advisory Committee Guidance
Ongoing deliberations regarding AI, blockchain, and fintech integration may yield balanced guidance to foster innovation while ensuring compliance.
Escalating State and Tribal Enforcement
Legislative proposals and tribal regulatory crackdowns are expected to intensify, further fragmenting oversight and necessitating robust, multi-layered compliance strategies.

Conclusion

As prediction markets eclipse $100 million in weekly trading volume and engage millions of users, the sector stands at a critical crossroads. The intensifying jurisdictional rivalry between the CFTC and SEC, amplified enforcement from states and tribal authorities, mounting political demands for content moderation, and complex international regulatory environments have combined to create a highly contested and challenging operational landscape.

Leading operators such as Kalshi, Polymarket, and DraftKings are responding with bold innovation, diversified product portfolios, enhanced compliance regimes, and strategic operational adjustments to harness mainstream momentum while managing mounting legal, political, and reputational risks.

The sector’s near-term trajectory hinges on decisive court rulings, forthcoming SEC rulemaking, CFTC guidance on emerging technologies, and evolving enforcement actions across multiple jurisdictions. Success will demand sophisticated legal strategies, agile innovation, and proactive regulatory engagement to sustain growth, legitimacy, and consumer trust in an increasingly complex environment.

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