Prediction markets are going mainstream, but their rapid growth is creating a legal minefield that operators and traders must navigate carefully.
What started as a niche tool for political junkies and cryptocurrency enthusiasts has evolved into a regulated sector attracting both Wall Street professionals and everyday investors. But this transformation has not been smooth. While these platforms now operate under federal oversight, they’re facing pushback from individual states that question whether prediction markets are legitimate financial products or simply gambling in disguise.
Unlike traditional sportsbooks, federally regulated prediction market platforms operate under the Commodity Exchange Act and rules set by the U.S. Commodity Futures Trading Commission. This framework treats prediction contracts as derivative products, giving them legitimacy in the eyes of institutional investors and retail traders. However, federal approval has not shielded these platforms from state-level challenges.
Sports-based contracts listed on registered platforms have triggered cease-and-desist letters and court injunctions in states including Nevada and New Jersey. These states are questioning whether event contracts should be classified as financial instruments or gambling products that require state licensing. The legal uncertainty creates significant risk for anyone operating or trading on these platforms.
But the state-federal conflict isn’t the only regulatory headache facing the prediction market industry. According to law firm K&L Gates, operators must also contend with “insider trading, conflicts of interest—and internal market making desks—cross-market manipulation risk, and the CFTC’s self-certification process.”
The insider trading concern is particularly thorny, according to the firm. Unlike stock markets, where insider information typically involves corporate earnings or mergers, prediction markets can involve virtually any event. Someone with advance knowledge of a political decision, sports injury, or business announcement could potentially profit from betting on outcomes they know in advance.
Related: Tennessee’s Bid to Ban Sports-Event Contracts in Prediction Markets Meets With Pushback
The CFTC’s self-certification process adds another layer of complexity. K&L Gates says this mechanism allows platforms to launch new contracts without prior agency approval, as long as they certify the contracts comply with relevant laws. While this speeds up innovation, it also means regulators are often reviewing contracts after they’re already being traded.
Congress may soon step into the fray, according to the guidance. There are indications that lawmakers are considering legislation specifically addressing insider trading and market manipulation in prediction markets. Such action would provide clearer rules for operators and traders but could also impose new restrictions on the types of contracts that can be offered.
The regulatory landscape will likely shift further under the CFTC’s new leadership. How the agency approaches prediction market oversight in the coming years could determine whether the sector continues its explosive growth or faces new constraints.
For now, anyone involved in prediction markets needs to understand they’re operating in legally uncertain territory, says K&L Gates. Platform operators face potential enforcement actions from both federal and state authorities. Traders must consider whether their activities could be viewed as illegal gambling in their home state, even if they’re using a federally regulated platform.
Market participants should monitor regulatory developments closely and seek legal guidance before launching new products or trading strategies. The prediction market boom shows no signs of slowing, but neither does the regulatory scrutiny surrounding it. As this sector matures, the rules of the game are still being written.
