Legal Battles Emerge Over Prediction Markets As Congress Raises Concerns

In a developing legal saga, the future of prediction markets is being tested as the U.S. Court of Appeals for the Ninth Circuit heard oral arguments on April 16, 2026, concerning Kalshi, a prediction markets platform. The case revolves around a Nevada state ban on event contracts offered by Kalshi, which the state claims requires a gaming license. This dispute could soon escalate to the U.S. Supreme Court, as legal experts speculate about the implications of state versus federal jurisdiction over these rapidly growing financial products.

Kalshi has faced multiple state-level enforcement actions, including criminal charges in Arizona. Recently, a federal court intervened, blocking Arizona authorities from enforcing state gambling laws on Kalshi's event contracts. During the oral arguments, Kalshi's attorney, Colleen Sinzdak, argued that the platform's event contracts should be classified as "swaps," placing them under the jurisdiction of the Commodity Futures Trading Commission (CFTC) rather than state gaming authorities. CFTC Chair Michael Selig has supported this view, which could significantly impact how prediction markets are regulated moving forward.

As lawmakers grapple with the implications of these markets, bipartisan criticism has emerged. During a House Agriculture Committee hearing on the same day as the Ninth Circuit's arguments, Selig faced tough questions about the risks associated with prediction markets and crypto platforms like Hyperliquid. Lawmakers raised alarms about insider trading and the ethicality of betting on events such as wars and political outcomes.

Concerns were heightened by reports of suspicious futures trades that occurred just before major announcements from former President Donald Trump, which reportedly netted unnamed investors hundreds of millions in profits. Selig, when pressed about whether Trump’s family members had prior knowledge of these announcements, defended the CFTC's efforts to combat insider trading but appeared evasive when confronted with potential wrongdoing.

"I’m not going to play speculation games with you," Selig responded to Rep. Jim McGovern (D-MA), who questioned the integrity of trades related to Trump's statements on negotiations with Iran. Just 15 minutes before Trump’s social media post, traders had wagered about $500 million on oil prices, which plummeted following the announcement.

Rep. Jim Costa (D-CA) expressed his disapproval of prediction markets related to war and death, stating, "I don’t believe this is market innovation. That is profiting from tragedy." He questioned whether such markets were ever intended to fall under the CFTC's jurisdiction. Selig acknowledged that he is currently working on proposed regulations for prediction markets, which will allow public input.

Critics have pointed out that the distinction between sports-related event contracts and traditional gambling is increasingly blurred. Selig has asserted that these contracts are not gambling, but Rep. Gabe Vasquez (D-NM) challenged this assertion, stating, "It’s clear to me you can’t tell [the difference], because the average consumer also can’t tell." This skepticism reflects a broader concern about the potential for consumer exploitation in an unregulated market.

Meanwhile, a recent investigation by the publication More Perfect Union (MPU) examined the business models of prediction markets, particularly Polymarket. The investigation revealed that Polymarket's forecast accuracy was only 67%, compared to Kalshi's 78% and PredictIt’s 93% for the 2024 U.S. elections. MPU's findings suggest that prediction markets may not be as reliable as their proponents claim, with the report highlighting that 0.04% of traders account for approximately 70% of the profits.

Experts interviewed by MPU raised doubts about the platforms' ability to control insider trading across various markets. U.S. Senator Chris Murphy criticized prediction markets related to government actions, arguing that they are unfairly rigged due to insider knowledge. He stated, "All bets on government actions are rigged because someone in the government knows the outcome." This sentiment is echoed by many who believe that such markets exploit economic anxieties under the guise of financial democratization.

Federal regulations currently exempt prediction platforms from local taxes and player protection requirements, creating a disparity with traditional bookmakers, who face stringent regulations and taxes. For example, in New York State, bookmakers pay a tax rate of up to 51%. This regulatory inequality has led to conflicts with state authorities, as Kalshi has faced lawsuits from over a dozen states demanding recognition of its activities as unlicensed gambling.

In response to these challenges, Kalshi and Polymarket have announced new measures aimed at combating insider trading. Still, the effectiveness of these measures remains in question, especially considering that clients of prediction market platforms reportedly lose more money in their first three months of trading than users of traditional sportsbooks.

As the prediction market industry is projected to reach $1 trillion by 2030, the stakes are high. The outcome of the Ninth Circuit's ruling and the CFTC's proposed regulations could set a precedent for how these platforms operate in the future. Kalshi's legal battle and the scrutiny faced by Selig indicate that lawmakers are grappling with the ethical and regulatory implications of these innovative yet controversial financial products.

With the potential for the case to escalate to the Supreme Court, the future of prediction markets hangs in the balance. As Congress continues to weigh the risks and benefits, the dialogue surrounding the legality and morality of betting on uncertain events will likely intensify.

As the situation develops, stakeholders in the prediction market space, including Kalshi and Polymarket, closely, anticipating how these legal and regulatory challenges will shape the industry's future.