Regulatory Risks in Prediction Markets Tied to Sports Events: Assessing the Long-Term Viability of CFTC-Licensed Platforms

The U.S. prediction market industry, which experienced explosive growth in 2025, now faces a critical juncture. While the Commodity Futures Trading Commission (CFTC) has taken steps to legitimize event contracts through licensing and no-action relief, a fragmented regulatory landscape-marked by state-level legal challenges and ambiguous federal preemption-threatens the long-term viability of even the most compliant platforms. For investors, the question is no longer whether prediction markets can thrive, but whether they can survive the escalating regulatory battles that define their existence.

Federal Framework: CFTC's Ambiguous Blessing

The CFTC's 2025 no-action letter to KalshiEX LLC, granting the platform conditional exemptions from swap-related recordkeeping and reporting requirements, was hailed as a milestone for the industry. This move, coupled with a joint statement from the CFTC and SEC in September 2025 emphasizing "harmonization" of regulatory frameworks, signaled a cautious federal openness to innovation. However, the CFTC's recent reorganization under Acting Chair Caroline Pham- prioritizing fraud prevention over aggressive enforcement-has left gaps in clarity for operators navigating overlapping jurisdictions.

The key issue lies in the definition of event contracts. While the CFTC treats them as commodities under the Commodities Exchange Act (CEA), the December 2025 Crypto.com ruling in federal court rejected the argument that sports-related event contracts qualify as "swaps" under the CEA. This decision effectively undermined the federal preemption claims of platforms like Kalshi, opening the door for state-level enforcement actions.

State-Level Pushback: A Legal Minefield

The Crypto.com ruling emboldened states to assert jurisdiction over prediction markets. Nevada, New Jersey, and Ohio have issued cease-and-desist orders against operators, arguing that event contracts on sports outcomes constitute illegal gambling under state law. Maryland's 2025 court decision further complicated matters by denying Kalshi a preliminary injunction, ruling that the CEA does not preempt all state gaming regulations.

This patchwork of state laws creates operational risks for CFTC-licensed platforms. For example, New York's proposed ORACLE Act- set to introduce age restrictions and consumer protections, and outright bans on sports and political prediction markets-could force operators to either comply with onerous state-specific rules or exit key markets. Pennsylvania's ongoing legislative hearings into the intersection of prediction markets and gaming laws suggest similar challenges are emerging nationwide.

Investor Implications: A High-Stakes Gamble

For investors, the regulatory uncertainty surrounding CFTC-licensed platforms raises three critical concerns:

1. Legal Exposure: Even platforms with federal licenses remain vulnerable to state-level enforcement. The Crypto.com ruling demonstrates that federal courts may not uniformly side with operators, particularly in cases involving sports-related contracts.
2. Market Fragmentation: State-specific regulations could force platforms to operate in a patchwork of jurisdictions, increasing compliance costs and limiting scalability. This fragmentation risks stifling innovation and investor returns.
3. Supreme Court Uncertainty: Pending legal disputes over federal preemption could reach the U.S. Supreme Court, introducing further volatility. A ruling narrowing federal jurisdiction would leave operators at the mercy of state legislatures.

The Path Forward: Clarity or Collapse?

The long-term viability of CFTC-licensed platforms hinges on resolving the federal-state regulatory conflict. While the CFTC and SEC's collaboration offers hope for a unified framework, the absence of clear legislative action leaves the industry in limbo. Investors must weigh the potential for regulatory clarity against the immediate risks of state-level crackdowns and judicial unpredictability.

For now, the prediction market industry remains a high-risk, high-reward proposition. Platforms with CFTC licenses enjoy a degree of legitimacy, but their survival depends on navigating a legal landscape where federal blessings are no guarantee of immunity. As states continue to assert authority, the question for investors is not just whether prediction markets can innovate, but whether they can endure.