NY Law Jnl
This year has been a busy one for the CFTC when it comes to prediction markets. In early 2026, the CFTC did away with a proposed rule from the Biden administration and announced plans to issue new rules for prediction markets, as we previously discussed in this column.
Since then, the CFTC has amped up its game. Asserting exclusive authority over prediction markets and arguing that its approval of prediction markets preempts any attempts by states to regulate or penalize them under state gambling laws, the CFTC has filed lawsuits against five states that have attempted to do just that.
So far, the CFTC has already obtained a preliminary injunction against Arizona, but the dispute between states and prediction markets, and now between states and the CFTC, is moving at lightning speed, and it is only widening. The CFTC’s aggressive posture may seem like a striking amount of support from a regulator toward its regulated entities—and perhaps it is—but the key issue for the CFTC appears to be whether prediction markets will be governed by one federal regulator or by a patchwork of state regimes.
I. The Legal Fight Over Prediction Markets and Gambling
Although the precise legal arguments vary slightly across the various lawsuits, the core dispute between the CFTC and the states is one of preemption.
Prediction markets allow traders to bid on whether events will or will not occur—for example, whether a sports team will win a particular game. The payout if a “yes” or “no” bid comes to pass is fixed, but the price of purchasing one of those bids varies depending on the number of people purchasing each bid.
The more people who buy a “yes” bid, predicting that the event is likely to occur, the more expensive a “yes” bid will be, and vice versa. Many states view bids like this, particularly those involving sports, as gambling. Regulation of gambling generally falls under the states’ broad “police powers,” and these states argue that the prediction markets are essentially unlicensed gambling regimes under state law.
On the flip side, the CFTC asserts that it may regulate prediction markets on the theory that these bids on outcomes, referred to as “event contracts,” qualify as “swaps” under the Commodities Exchange Act (CEA). Only entities that the CFTC registers as “swap execution facilities” or “designated contract markets” (DCM) may operate “a facility for the trading or processing of swaps.” 7 U.S.C. §7b-3(a)(1).
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