Prediction Markets Face Divided Courts and a Widening Political Fight

Prediction markets are expanding under federal protections that remains contested in court, while Congress has yet to advance legislation settling how they should operate. The result is an unstable regulatory landscape in which federal registration offers platforms neither assured nationwide access nor insulation from state gambling enforcement.

Sections III and IV of K&L Gates’ 2026 mid-year report describe two overlapping disputes: what restrictions Congress should impose on event contracts, and whether existing federal derivatives law displaces state gambling laws. The Trump administration’s defense of exclusive federal oversight has intensified both battles.

Congressional activity has generated proposals rather than comprehensive legislation. At least 21 bills concerning prediction markets had been introduced in the 119th Congress, but none have left the committee where the report was written. One narrower measure did take effect: an April Senate resolution, adopted unanimously, prohibited senators and Senate employees from trading on prediction markets.

Pending measures range from restrictions on trading using material nonpublic information to outright participation bans covering categories of government officials and, under some proposals, family members. The Campaign Funds Integrity Act would prohibit using campaign funds for prediction-market transactions, with monetary and criminal penalties.

Other bills target the platforms themselves. The STOP Corrupt Bets Act would bar contracts involving sports, military action, elections and federal government actions. The Death Bets Act would prohibit contracts concerning war, death or similar activities. Separate proposals address deceptive advertising, promotional claims and age verification, including mandatory facial recognition.

Lawmakers also envision different supervisory structures. The Prediction Market Act would establish consumer-protection and innovation advisory councils within the Commodity Futures Trading Commission (CFTC) and require studies of enforcement adequacy and SEC-CFTC jurisdiction. The Prediction Markets Security and Integrity Act would condition operations on authorization under state wagering programs approved by the U.S. attorney general, with advertising standards, gambling-treatment funding and other safeguards.

Courts, meanwhile, are divided over the threshold legal issue: whether sports event contracts qualify as swaps under the Commodity Exchange Act and therefore fall within a federal regime that preempts state gambling restrictions.

A divided Third Circuit sided with Kalshi in April, supporting preliminary relief against New Jersey enforcement. K&L Gates stresses that this was a preliminary-injunction ruling, not a final merits determination. Appeals involving Nevada, Maryland, Ohio and Tennessee remained pending in the Ninth, Fourth and Sixth Circuits when the report was published.

Lower-court outcomes underscore the uncertainty. Courts in Michigan and Wisconsin rejected requests to block state enforcement, questioning whether sports contracts qualified as swaps. Arizona and Minnesota decisions provided preliminary protection against state action. Tribal lawsuits add another jurisdictional layer, asserting sovereign authority over gambling on tribal lands.

The CFTC and Justice Department have countered state enforcement through lawsuits asserting federal supremacy. In Michigan, the CFTC invoked emergency authority to direct Kalshi to fulfill trades a state court had ordered canceled. The New York Times reported a second emergency intervention in New York this month, illustrating how regulatory conflict can expose platforms to competing directives.

The political confrontation cuts across party lines. The Times reported that 20 states were involved in litigation and 44 had signed a letter criticizing prediction markets. Traditional gambling companies are pressing states to act, arguing that federally registered competitors evade the licensing, taxes and protections governing sports betting.

Donald Trump Jr., an adviser to Kalshi and Polymarket with financial interests in both, urged Republican attorneys general to accept federal oversight, according to the Times. His spokesman said he does not engage with the federal government for companies he advises or invests in.

The contest also extends to statehouses. North Carolina approved language recognizing federally registered prediction markets and imposing a 6% revenue tax, compared with 23% for sports gambling firms, the Times reported.

For platforms and their partners, federal registration remains the starting point rather than a settled answer. Legislative proposals could reshape permissible products and compliance obligations, while pending appeals will determine how far federal oversight can shield operations from state and tribal law.

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