Swaps or Wagers? How Sports-Related Prediction Markets Exploit a Regulatory Gap That Puts Consumers and Sports Integrity at Risk

I. Introduction

In January 2025, a New York-based derivatives exchange called KalshiEX LLC began listing binary contracts tied to the outcomes of NFL, NBA, NHL, and NCAA games. The contracts worked exactly like sports bets: a user paid a price between one cent and ninety-nine cents for a “yes” or “no” position on whether a team would win, and received a dollar if correct.  But Kalshi did not hold a gaming license in any state. It did not operate under any state’s responsible-gambling framework. It was not subject to the integrity agreements that licensed sportsbooks maintain with professional and collegiate leagues. Instead, Kalshi structured its products as “event contracts,” a type of derivative, and listed them on its exchange under the regulatory authority of the Commodity Futures Trading Commission (“CFTC”). Interest was immediate.  During the 2025 March Madness tournament alone, the American public poured over $500 million into Kalshi’s college basketball markets.

Kalshi’s entry into sports has ignited a jurisdictional crisis that exposes a fundamental flaw in how the United States regulates wagering on athletic competition. On one side stand state gaming commissions, which have spent the seven years since the Supreme Court’s landmark decision in Murphy v. National Collegiate Athletic Association building consumer-protection regimes to govern a $10.9-billion industry. Thirty-eight states and the District of Columbia have legalized sports betting since Murphy struck down the Professional and Amateur Sports Protection Act (“PASPA”) as an unconstitutional violation of the anticommandeering doctrine, and those states enacted responsible-gambling frameworks precisely because they recognized that sports wagering carries unique risks of addiction and financial harm. On the other side stands a single federal agency, the CFTC, whose regulatory tools were designed for commodity futures, not consumer-facing sports wagers. This Paper argues that applying the Commodity Exchange Act’s (“CEA”) exclusive-jurisdiction framework to sports event contracts creates a dangerous gap in consumer protection, undermines sports integrity, and represents regulatory arbitrage that Congress never intended.

II. The Prediction Market Playbook: Structuring a Sports Bet as a Swap

The Commodity Exchange Act grants the CFTC “exclusive jurisdiction” over transactions involving contracts of sale of a commodity for future delivery and swaps traded on designated contract markets (“DCMs”). The CFTC retains authority under Regulation 40.11 to review and prohibit certain event contracts that are contrary to the public interest, including those involving “gaming.” In September 2024, however, a federal court in Washington, D.C. held that political event contracts offered by Kalshi did not constitute “gaming” under the CEA, rejecting the CFTC’s attempt to prohibit them. The CFTC initially appealed but withdrew its challenge in May 2025 after the change in presidential administration.

The withdrawal was a green light. Kalshi self-certified sports event contracts within weeks and began offering markets on professional and collegiate games before any regulatory body had affirmatively determined that such contracts served the public interest. The strategy was elegant in its simplicity: by labeling a sports bet as a “swap” and trading it on a CFTC-registered exchange, Kalshi could bypass state licensing requirements, avoid responsible-gambling mandates, and claim the protection of federal preemption if any state objected. Several states did object, and they did so loudly.

III. Six States Objected, and the Courts Could Not Agree

Gaming commissions in at least six states (Nevada, New Jersey, Maryland, Ohio, Montana, and Illinois) issued cease-and-desist orders, asserting that Kalshi’s sports event contracts constituted unlicensed gambling in violation of state law. Kalshi sued in federal court, arguing that the CEA’s exclusive-jurisdiction provision preempted state gaming regulation. The resulting litigation has produced irreconcilable outcomes that demonstrate why the current framework cannot hold.

In April 2025, the District of Nevada granted Kalshi a preliminary injunction, concluding that the CEA’s grant of exclusive jurisdiction to the CFTC constituted both express and field preemption of state gaming laws as applied to contracts traded on a DCM. The District of New Jersey reached the same conclusion weeks later. But the District of Maryland rejected Kalshi’s preemption theory entirely, reasoning that Congress did not intend for the CEA to displace decades of state sovereignty over gaming regulation.

The split then deepened within a single state. In October 2025, the same Nevada judge who had initially sided with Kalshi reversed course, dissolving the earlier injunction after concluding that certain Kalshi products, particularly prebuilt parlays and player-prop-style contracts, were not swaps under the CEA and therefore fell squarely within the state’s gaming jurisdiction. Meanwhile, a California district court dismissed a suit brought by Native American tribes on jurisdictional grounds, holding that the question belongs to the CFTC itself. The result is a patchwork of conflicting rulings now headed to at least two circuit courts, with the prospect of Supreme Court review.

Thirty-four state attorneys general have weighed in, filing an amicus brief urging the Third Circuit to reverse the New Jersey ruling. Their central argument deserves serious consideration: Kalshi’s products are functionally indistinguishable from sports bets, and the CEA’s regulatory framework was never designed to replace the consumer protections that states have built to govern gambling.

IV. The Consumer Protection Gap Is Real and Growing

The most urgent policy concern is not doctrinal; it is practical. State gaming frameworks enacted after Murphy share common features born of hard experience with gambling’s social costs: age verification, responsible-gambling programs, self-exclusion lists, advertising restrictions, dispute resolution procedures, and mandatory reporting. Federal law supplements these with prohibitions on interstate gambling transactions. These protections exist because legislatures recognized that sports wagering carries distinctive risks of addiction and financial harm.

The CFTC’s regulatory apparatus offers none of this. It was designed to protect institutional participants in commodity and derivatives markets, not individual consumers placing binary bets on basketball games. The CEA’s core requirements (margin rules, clearing mandates, position limits) address systemic financial risk. The CFTC does not require self-exclusion programs. It does not mandate responsible-gambling disclosures. It does not restrict predatory advertising targeting young bettors. And it does not coordinate with state problem-gambling agencies. The practical consequence is stark: a consumer who places a $50 bet on an NFL game through DraftKings in New Jersey receives the full benefit of that state’s responsible-gambling infrastructure, while a consumer who places a functionally identical $50 bet on the same game through Kalshi receives none of it.

The CFTC itself appears uncomfortable with this state of affairs. In September 2025, the Commission issued an advisory cautioning that it “has not taken any official action” approving the listing of sports-related event contracts. This is a remarkable posture as the agency that claims exclusive jurisdiction over these markets has disclaimed having approved them, while simultaneously asserting that no other regulator may step in.

V. Sports Integrity Falls Through the Cracks

Beyond consumer protection, prediction markets create sports-integrity risks that the CFTC is institutionally unequipped to manage. State gaming commissions maintain cooperative relationships with professional and collegiate leagues to monitor suspicious wagering, investigate match-fixing, and enforce prohibitions on insider betting by athletes, coaches, and officials. These relationships are formalized through integrity agreements, data-sharing protocols, and real-time monitoring systems.

Prediction markets operating under the CFTC framework exist outside these networks entirely. Kalshi’s self-certified contracts explicitly disclaim endorsement by the NFL, NBA, NHL, or NCAA. No integrity agreement governs the exchange’s relationship with the leagues whose contests determine contract payouts. The CFTC’s surveillance infrastructure, built to police manipulation in oil futures and interest-rate swaps, lacks the sport-specific expertise that state gaming investigators have developed over years of cooperation with leagues. Position-limit rules designed for commodity markets may be poorly calibrated to detect the kind of correlated, low-dollar wagering patterns that signal match-fixing in sports. This gap is particularly acute for amateur athletics. The NCAA’s governance structure is fragile, and collegiate athletes remain uniquely vulnerable to corruption given their historically limited compensation, even as NIL opportunities have begun to change the economic landscape. State gaming laws frequently impose heightened restrictions on college-sports wagering, and several states prohibit it entirely. Those restrictions reflect a deliberate legislative judgment that the integrity risks surrounding amateur competition warrant special protection. None of them apply to event contracts traded on a CFTC-registered exchange.

VI. Congress Should Close the Gap Before the Courts Make It Permanent

The courts will eventually resolve the preemption question, likely at the Supreme Court level.  But waiting for that resolution is risky. If the Third or Fourth Circuit adopts the broad preemption theory endorsed by the New Jersey and initial Nevada decisions, the result will be a permanent carve-out from state gaming law for any company that structures its sports bets as CFTC-regulated event contracts. Companies like Sleeper Markets LLC are already lining up to enter the market. DraftKings and FanDuel have announced prediction-market business lines. The longer Congress waits, the more entrenched this regulatory arbitrage becomes.

A targeted legislative fix need not dismantle the prediction-market industry. Congress should amend the CEA to clarify that the CFTC’s exclusive-jurisdiction provision does not preempt state gaming laws as applied to event contracts whose underlying events are the outcomes of professional or amateur sporting events. This approach would preserve the CFTC’s authority over event contracts generally (weather futures, political outcomes, economic indicators) while recognizing that sports wagering involves a distinct set of consumer-protection and integrity concerns that states are better positioned to address. Alternatively, Congress could adopt a cooperative-federalism model, analogous to frameworks it has employed in environmental and securities regulation, requiring any exchange listing sports event contracts to comply with baseline consumer-protection standards equivalent to state gaming requirements: age verification, self-exclusion programs, responsible-gambling disclosures, advertising restrictions, and mandatory integrity agreements with the relevant leagues. Such a model would also require the CFTC to coordinate with state gaming commissions on suspicious-activity monitoring, closing the information-sharing gap that currently exists. The Dodd-Frank Act’s expansion of CFTC jurisdiction over swaps was designed to close gaps in derivatives regulation following the 2008 financial crisis, not to create a federal safe harbor for sports gambling. The post-Loper Bright judicial environment, which demands closer statutory interpretation rather than deference to agency constructions, further supports reading the CEA’s preemptive reach narrowly.

VII. Conclusion 

The Murphy Court observed that “Congress can regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own.” That principle is now under threat. Sports-related prediction markets have found a way to offer the functional equivalent of a sports bet while claiming the jurisdictional protections of federal commodities law, sidestepping the consumer safeguards and integrity infrastructure that states spent years building. The current framework, in which identical products are subject to entirely different regulatory regimes depending on what they are called, is untenable. It fails to protect consumers, it compromises sports integrity, and it represents a form of regulatory arbitrage that neither Congress nor the CFTC ever intended. If Congress does not act, the courts will be left to resolve a conflict the law was never designed to address, and consumers will bear the cost.

Zahan Shokrekhuda is the 2026 Conduct Detrimental Writing Competition runner-up. This article placed him second.