For years, prediction market founders and their backers have operated on a simple assumption: Register as a federally regulated designated contract market, plug into the Commodity Exchange Act, and state gambling laws become someone else’s problem.
However, a federal court in Nevada has complicated things, shattering this theory with a ruling that says contracts paying out on the outcome of a sporting event are not swaps under the Commodity Exchange Act, meaning they do not fall within the Commodity Futures Trading Commission’s federal jurisdiction.
In the ruling, Judge Andrew Gordon made clear that this was not just a technical reading of the statute. It was about protecting the economic interests of the state’s core industry – gambling.
“Licensed gaming companies have invested millions of dollars to comply with state regulations only to supposedly find out that they could have just become CFTC-registered exchanges to offer sports gambling nationwide for anyone over the age of 18 without complying with Nevada’s gaming regulatory regime or paying taxes in this state,” Gordon wrote.
Federally regulated status was supposed to be the firewall that protected the industry from state-by-state regulation.
Speaking with CoinDesk earlier this year, New York-based crypto attorney Aaron Brogan argued that the entire prediction-market model rests on a single premise: Once a platform is federally registered, “the states can’t regulate you,” because federal law preempts state gambling rules under the Commodity Exchange Act.
Brogan also argued that prediction markets differ from gambling because they operate like exchanges rather than sports books.
“Prediction markets aren’t gambling because they’re not structured to be,” he said, noting that platforms like Kalshi match counterparties and earn fees rather than take the other side of a wager like a traditional casino.
Judge Gordon warned that if Kalshi’s view were adopted, “there is a not-insignificant chance that the regulated entities in this state will abandon their current model and become DCMs, unleashing even more unregulated gambling and devastating the Nevada economy and related tax revenues.”
DMC, or Designated Contract Market, is a board of trade or exchange designated by the CFTC to offer contracts for future delivery and swap execution in the regulated derivatives market in the U.S.
Kalshi has asked for a stay pending appeal. Nevada has already promised to oppose it and pursue enforcement, as the state now has a clear legal path to pursue a criminal case if it believes Nevada residents can access those contracts and Kalshi continues operating without a license.
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The appeals process will determine whether the swap definition can be read broadly enough to pull outcome-based contracts back under the CEA and restore the preemption argument.
If that effort fails, the DCM model will no longer be a turnkey solution for prediction markets. It will be the starting point for a state-by-state compliance battle.
In other words, the future of prediction markets no longer turns on whether they can win federal approval, but on whether they can survive a patchwork of state gambling laws that were never written with DCMs in mind and may now decide their fate.
