This article is part of MACo’s Policy Deep Dive series, where expert policy analysts explore and explain the top policy issues of the day.

Prediction markets have quickly moved from a niche forecasting tool into the mainstream, with users trading on elections, sports, government decisions, and world events. Their growth has opened a difficult legal fight over whether states may regulate them as gambling or whether federal commodities law leaves that authority almost entirely with the federal government.

Maryland’s election administrator has asked the State Prosecutor to investigate election contracts offered during the 2026 primary. Four days later, a federal judge blocked Minnesota from enforcing the nation’s most direct state ban on prediction markets.

The Short Version

Prediction markets allow users to buy and sell contracts tied to future events. A contract might ask whether a candidate will win an election, whether a bill will pass, or whether a team will win a championship. A winning contract generally settles at $1, while a losing contract settles at zero.

Platforms such as Kalshi and Polymarket US argue that these products are federally regulated derivatives, not ordinary gambling. The Commodity Exchange Act gives the CFTC exclusive jurisdiction over qualifying swaps and futures traded on federally designated exchanges.

State regulators argue that many sports and election contracts function exactly like wagers while bypassing state licensing requirements, gambling taxes, and the consumer protections required of sportsbooks and casinos.

The courts have not settled the dispute. Some judges have allowed states to enforce their gambling laws. Others have found that federal commodities law preempts state enforcement against federally designated exchanges.

A direct state ban on federally listed contracts therefore faces substantial legal risk. States and local governments have more room to address election manipulation, fraud, bribery, misuse of nonpublic information, conflicts of interest, and official conduct.

What Is a Prediction Market?

A prediction market turns a question about a future event into a tradeable contract.

Suppose a contract asks whether a candidate will win an election. If “yes” contracts trade at 62 cents, observers often describe the price as an implied 62% probability. A trader who buys at 62 cents earns 37 cents per contract if the candidate wins and loses the 62-cent investment if the candidate loses.

Unlike a traditional sportsbook wager, traders can often sell their positions before the event occurs. Prices move as traders react to polling, injuries, economic data, breaking news, government announcements, and other information.

Platforms present those prices as a way to combine information and forecast outcomes. But a market price does not provide a scientific probability. Thin trading, large individual positions, transaction costs, and market rules can all distort the signal.

Users may call it trading, but they are still putting money on an uncertain outcome.

How Prediction Markets Became So Popular

Prediction markets existed long before the current debate, but the number and variety of contracts have grown rapidly.

The Commodity Futures Trading Commission reports that federally designated exchanges listed an average of roughly five event contracts per year between 2006 and 2020. That number rose to 131 in 2021 and approximately 1,600 in 2025.

Platforms now offer markets on elections, sports, legislation, inflation, interest rates, court decisions, entertainment, weather, military conflicts, and government actions. Mobile applications and media partnerships have placed those markets in front of a much wider audience.

That growth has changed the policy debate. A limited market used to hedge economic risks looks very different from a mobile platform offering hundreds of contracts on candidates, athletes, and breaking news. Federal law does not draw a clean line between them.

Why Platforms Say Their Contracts Are Not Gambling

The Commodity Exchange Act gives the CFTC exclusive jurisdiction over swaps and futures traded on federally designated contract markets. Kalshi and Polymarket US operate through entities that hold that federal designation.

The platforms argue that event contracts qualify as derivatives because their value depends on a future occurrence. Under that theory, federal commodities law governs the contracts even when the underlying event involves an election or sporting contest.

The label matters. States traditionally regulate gambling through licensing, age restrictions, advertising standards, integrity requirements, consumer protections, taxes, and limits on permissible wagers. A federally regulated derivatives exchange does not need a separate gambling license in every state if the Commodity Exchange Act preempts those laws.

Congress also gave the CFTC authority to review contracts involving gaming, terrorism, assassination, war, unlawful activity, and similar matters. The agency may prohibit those contracts when it finds that they run contrary to the public interest. Platforms cite that authority as evidence that Congress assigned even sensitive event-contract decisions to the federal regulator.

State officials reject the idea that a federal label changes the substance of the transaction. In a multistate filing supported by Maryland Attorney General Anthony Brown, attorneys general argued that sports event contracts remain indistinguishable from sportsbook wagers and allow companies to bypass state safeguards and taxes.

Where Federal Preemption Enters the Debate

That disagreement has pushed states and prediction-market operators into federal court. The central question is whether the Commodity Exchange Act prevents states from applying their gambling laws to contracts traded on CFTC-designated exchanges.

Platforms make two related arguments. First, they say Congress gave the CFTC exclusive jurisdiction over qualifying swaps and futures traded on designated contract markets. If a prediction contract falls within that jurisdiction, a state cannot regulate the same transaction as gambling.

Second, they argue that state restrictions conflict with the federal system. If the CFTC allows an exchange to list a contract, a state prohibition could override that federal decision and prevent the exchange from offering the same market nationwide.

States respond that listing a wager on a federally regulated exchange does not automatically transform it into a protected financial derivative. They also point to their longstanding authority to regulate gambling, protect consumers, and determine which forms of wagering may operate within their borders.

The outcome often turns on how the court classifies the contract. If it qualifies as a federally regulated swap or future, the platform has a much stronger preemption argument. If it falls outside the Commodity Exchange Act, the state retains its traditional authority over gambling.

Minnesota Tested a Direct Ban

Minnesota tried to settle the issue through a statewide prohibition. Its law barred companies from creating, operating, or advertising prediction markets and included criminal penalties.

The United States, Kalshi, and Polymarket US sued before the law took effect. They argued that Minnesota could not prohibit contracts offered through CFTC-designated exchanges.

On July 27, US District Judge Katherine Menendez temporarily blocked Minnesota from enforcing the law.

The judge found that the challengers would likely succeed on at least part of their federal preemption claims. She concluded that contracts involving a US Senate election, an NBA signing, the World Cup, and the Strait of Hormuz could qualify as swaps because those events carry potential financial, economic, or commercial consequences.

The ruling did not protect every type of event contract. The judge questioned whether contracts involving a reality television winner or a phrase used during a broadcast would fall within federal law. She also issued a preliminary injunction, not a final decision.

The opinion nevertheless shows why a blanket state ban faces an uphill legal fight. Some contracts may fall within the CFTC’s exclusive jurisdiction even when customers use them mainly to gamble.

Other courts have reached different conclusions. A federal judge in Maryland declined to block State enforcement against Kalshi’s sports contracts. Kalshi appealed, and the case remains pending. A divided federal appeals court sided with Kalshi in New Jersey, while a New York court recently allowed state enforcement to proceed.

For now, the answer depends on the contract, the state law, and the court hearing the case.

Maryland Focuses on Elections

Maryland is approaching the issue through its election laws.

According to Maryland Matters, State Administrator of Elections Jared DeMarinis asked the Office of the State Prosecutor to determine whether election contracts offered during the 2026 primary violated Maryland’s prohibition against wagering on election outcomes.

Traders put hundreds of thousands of dollars into contracts tied to Maryland races through platforms including Kalshi and Polymarket. DeMarinis warned that financial interests in election outcomes could undermine public confidence and create incentives for people to influence, or appear to influence, results.

The State Prosecutor must now determine whether Maryland’s wagering laws apply and whether federal law limits any enforcement action. A case directed at a CFTC-designated exchange would likely trigger the same preemption arguments raised in Minnesota and other states.

Maryland has also taken a narrower step. In April, Governor Wes Moore issued an executive order prohibiting executive branch officials and employees from using nonpublic government information for personal gain through prediction markets or other financial transactions.

Election contracts make that distinction especially important. Candidates, campaign staff, election workers, vendors, and government officials may know things that other traders do not. Some can also affect the outcome of a contract through their own decisions.

A candidate can withdraw. A campaign can time an announcement. An election worker may know that an unresolved counting issue will delay a result. Even small trades can raise questions about conflicts of interest, insider information, and public trust.

Prediction markets can also fuel premature or misleading claims. A market price may move before local election boards finish counting ballots, conducting audits, or certifying results. That movement does not determine who won. Voters cast ballots, local boards canvass returns, and election officials certify the outcome under state law.

What States and Counties Can Do

States face the greatest legal risk when they try to ban contracts listed on a CFTC-designated exchange or force that exchange into the state gambling system.

They have a stronger case when they regulate conduct instead of the contract. That includes fraud, bribery, threats, election interference, manipulation, misuse of confidential information, and corruption.

States can also restrict public officials, candidates, election workers, and contractors from trading on matters they can influence through their duties. They can require disclosures and recusals, prohibit the use of nonpublic government information, and investigate conduct that may violate election, ethics, campaign finance, consumer protection, or criminal laws.

At least 15 states considered prediction-market legislation in 2026, according to the National Conference of State Legislatures. The proposals included age restrictions, taxes, studies, limits on political trading, and prohibitions on insider activity. Courts may treat each approach differently depending on whether it regulates the exchange or the people using it.

Counties have less independent authority over the platforms, but they control their own ethics, personnel, procurement, and contracting policies. Counties can prohibit employees and contractors from using nonpublic information, require disclosure of financial interests connected to official duties, and establish clear recusal rules.

Local boards of elections can train staff to recognize suspicious contacts, requests for nonpublic information, and attempts to manipulate public reporting. They should refer suspected fraud, election interference, or misuse of official information to the State Board of Elections, State Prosecutor, law enforcement, or the appropriate ethics authority.

County election offices should also continue directing residents and the media to official canvass and certification information. A prediction-market price has no legal or administrative significance.

The Bottom Line

Prediction markets may look like gambling, but federal regulation makes them much harder for states to control than a sportsbook or casino.

The Minnesota ruling bolsters the platforms’ preemption argument without resolving it. Maryland’s election referral could eventually test whether states can apply wagering laws without intruding on the CFTC’s authority.

States and counties still have room to address election manipulation, fraud, conflicts of interest, misuse of nonpublic information, and abuse of public office. But a broader decision about which prediction contracts may trade nationwide will likely come from Congress, the CFTC, or the federal courts.

Stay tuned to Conduit Street for more information.