For years, prediction markets felt like a Wild West. They operated in a gray area, often offshore or under legal interpretations that led to constant uncertainty.
Today, a new generation of prediction market platforms is emerging with clear federal oversight, making them a legitimate and increasingly mainstream option for traders.
The key player in this shift is a powerful, yet often misunderstood, government agency: the Commodity Futures Trading Commission (CFTC).
What is the CFTC?
The Commodity Futures Trading Commission (CFTC) is an independent agency of the U.S. government established in 1974. Its primary mission is to protect market users and the public from fraud, manipulation, and abusive practices related to the trading of commodity futures and options.
Think of them as the financial watchdog for everything from corn futures to interest rate swaps.
Why Does the CFTC Regulate Prediction Markets?
So, why prediction markets? Because the CFTC views prediction market contracts as a form of "event contracts"—a type of derivative that derives its value from the outcome of a future event (e.g., "Will the Seahawks win the Super Bowl?", "Will Newsom win the 2028 presidential election?", etc.).
Event contracts are financially sophisticated instruments, and just like other derivatives, they fall under the CFTC's jurisdiction to ensure fairness, transparency, and market integrity.
How Do Prediction Markets Get CFTC Approval? The "DCM" Path
For a prediction market to legally operate in the U.S. and offer event contracts to retail investors, it needs the CFTC's explicit approval. The most common path is to become a Designated Contract Market (DCM).
A DCM is essentially a CFTC-regulated exchange, similar to the Chicago Mercantile Exchange (CME) where major financial contracts trade. To get this status, a prediction market operator must submit a detailed application demonstrating how it meets a rigorous set of Core Principles established by the CFTC. These principles cover everything from fair access and market surveillance to financial integrity and participant protection.
Kalshi is a prime example of a DCM. They went through this extensive approval process to offer a wide range of event contracts to U.S. traders. Other prediction market contenders, including Polymarket, are either pursuing or have obtained similar regulatory standing to ensure they operate within the confines of U.S. law.
What's the Difference Between a DCM and an FCM?
You might also hear the term Futures Commission Merchant (FCM). It's important to understand the distinction:
DCM (Designated Contract Market): This is the exchange itself, where contracts are listed and traded. Kalshi is a DCM.
FCM (Futures Commission Merchant): This is typically a firm that accepts customer funds and executes trades on a DCM. Think of them as the brokerage firm that connects you to the exchange. Some DCMs, like Kalshi, act as their own FCM, directly handling customer accounts. Others might operate as FCMs, such as Fanatics Markets which is connected to the DCM Crypto.com.
This structure ensures that there are clear responsibilities for both the trading venue and the handling of customer funds, providing a robust regulatory framework.
Are Prediction Markets Legal in All 50 States?
Because the prediction markets are regulated at the federal level, you think they'd be legal in all 50 states. But this is where things get tricky.
While the CFTC provides federal oversight, states still have their own laws, particularly concerning gambling. This creates a fascinating legal tension:
Federal Supremacy: Generally, federal law (like CFTC regulation) preempts conflicting state laws. If the CFTC explicitly authorizes a prediction market as a legitimate financial exchange, then state gambling bans should not apply.
Ongoing Scrutiny: However, state attorneys general and regulators can still raise challenges or interpret their laws in ways that could create legal hurdles. The CFTC's approval does not automatically guarantee a smooth ride in all 50 states, especially as these markets delve into politically sensitive or sports-related outcomes. Regulated prediction markets must remain vigilant and sometimes navigate these state-level questions.
State-Level Challenges: Can States Ban CFTC-Regulated Markets?
Some states, including Hawaii, Massachusetts, Nevada, Tennessee, and Arizona, have issued cease-and-desist orders to prediction market apps such as Kalshi.
For users, this means that even a CFTC-approved platform might still have restrictions on certain types of markets or on users from specific states if there are ongoing legal challenges or ambiguities.
Prediction markets and the CFTC will likely continue to face pressure from states looking to protect their existing iGaming industries. But for now, most eligible Americans have access to legal trading at one app or another.
The Bottom Line for Traders
The CFTC's involvement brings a level of legitimacy and security to prediction markets that was previously lacking. For traders, this means:
Enhanced Consumer Protection: Funds are segregated, market integrity is monitored, and rules are in place to prevent manipulation.
Clearer Legal Landscape: Operating within a federally regulated framework reduces the risk of legal uncertainty.
Transparency: Rules for listing contracts, resolving outcomes, and handling disputes are clearly defined.
- Protected Market Mechanics: Complex topics such as Liquidity vs. Accuracy and Open Interest vs. Volume guide price fluctuations, so the CFTC helps regulate these principles.
As the prediction market industry continues to grow and innovate, the CFTC will remain the central authority shaping its evolution in the United States. For platforms like Kalshi, this federal oversight isn't a hurdle—it's the foundation for building a trustworthy and robust financial product for the masses.
Read Next: How Does Kalshi Work?
