Regulation

Are Prediction Markets Gambling? CFTC Rules vs State Law

The CFTC decides if an event contract is gaming under Rule 40.11; the Third Circuit's 2-1 Kalshi ruling shows how far that shields platforms from state law.

By Polycasino Sector Sheet20 Oct 20265 min read

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A flat steel seesaw tipped down under one heavy black block while a small stack of green tokens sits lifted on the other end.

Whether prediction markets count as gambling in the U.S. depends on who decides. When they trade as event contracts on a CFTC-regulated exchange, the statute hands the Commission, not state gaming law, the call on whether a contract involves gaming against the public interest. Whether that federal label beats a state gambling statute is a separate question, and the courts are answering it one circuit at a time.

The record as of October 2026: the CFTC has used its gaming power against Kalshi's congressional control contracts, and the first federal appeals court to rule on preemption has sided with Kalshi against New Jersey.

Are prediction markets really just gambling?

Not by federal definition: the difference is which regulator classifies the contract and under what test. The Commodity Exchange Act treats gaming as one category the CFTC may find contrary to the public interest, alongside unlawful activity, terrorism, assassination and war.

The statute's list of public-interest categories ends with gaming and a catch-all for similar activity the Commission defines by rule. The federal test is open-ended, and it turns on a Commission determination rather than on whether a state calls the product a bet.

The implementing rule sits in Rule 40.11. Under 40.11(a)(1), registered entities may not list excluded-commodity event contracts that involve terrorism, assassination, war or gaming, or activity unlawful under state or federal law. So the federal regime does not say prediction markets are never gambling. It says a federal regulator decides, contract by contract.

How the CFTC applies the gaming test

The CFTC can pull a listed contract into a 40.11(c) review, and that review runs 90 days from notice to the exchange. The statute separately requires final action within 90 days of starting a review unless the offering party agrees to extend the deadline.

The test case on the record is Kalshi's congressional control contracts:

Date	Body	Action	Result
June 2023	CFTC	Opened a 40.11(c) review of Kalshi's congressional control contracts	Review clock started
September 2023	CFTC	Disapproved the contracts	Found gaming and state-unlawful activity, contrary to the public interest
April 2026	Third Circuit	Affirmed a preliminary injunction for Kalshi against New Jersey, 2-1	Field and conflict preemption held to apply

The CFTC opened its review on 22 June 2023 and closed it with an order finding the contracts involve gaming and activity unlawful under state law. There, a prediction market contract was classed as gaming, and the finding came from the federal regulator, not a state.

What is the legality of prediction markets in the U.S.?

Prediction markets are legal at the federal level when listed on a CFTC-registered exchange and not disapproved, but their exposure to state gambling law is still being litigated. The controlling question is preemption: whether the Commodity Exchange Act displaces state gaming enforcement against these contracts.

In KalshiEX LLC v. Flaherty, the Third Circuit held that both field and conflict preemption apply. The ruling was 2-1 and is described as the first federal appellate ruling on preemption of state gambling enforcement against prediction market operators.

Two limits matter for anyone reading it as a national green light:

Stage. The court affirmed a preliminary injunction because Kalshi showed a reasonable chance of success on preemption, not a final judgment on the merits.
Reach. The Third Circuit covers only four jurisdictions: New Jersey, Pennsylvania, Delaware and the U.S. Virgin Islands. Courts elsewhere are not bound by it.

The majority also pointed to the regulator's own posture. The CFTC has not found sports event contracts contrary to the public interest and has chosen not to enforce Rule 40.11 against them. That undercuts the argument that sports contracts are already banned federally as gaming: the federal ban exists on paper, but the agency that owns it has not applied it to sports.

The result is a split record. Congressional control contracts have been found to involve gaming by the CFTC itself; sports contracts have not, and New Jersey is held back by a preliminary injunction from treating Kalshi's as unlicensed betting. For how these rules show up in a live sports market, see the World Cup prediction markets rules and settlement note.

Sector questions

Why is Kalshi not gambling under federal law?

Kalshi lists event contracts on a CFTC-regulated exchange, and federal law leaves it to the Commission to decide whether a contract involves gaming and is contrary to the public interest. The Commission did reach that finding for Kalshi's congressional control contracts in 2023, but the Third Circuit noted it has not done so for sports contracts.

How do prediction markets avoid state gambling laws?

They argue federal preemption: that the Commodity Exchange Act, which puts event contracts under the CFTC, displaces state gaming statutes. The Third Circuit accepted field and conflict preemption against New Jersey at the preliminary injunction stage.

Will prediction markets become illegal?

The federal path to restricting them already exists. The statute lets the CFTC find gaming contracts contrary to the public interest and adds a catch-all for similar activity it defines by rule, so a future Commission determination could narrow what exchanges list.

Does the Third Circuit ruling apply nationwide?

No. It binds courts in New Jersey, Pennsylvania, Delaware and the U.S. Virgin Islands only, and it upheld a preliminary injunction rather than deciding the case on its final merits.