Why Prediction Markets Are Legal (When Sportsbooks Aren't)

One of the most common questions from bettors is how event-contract prediction markets like Kalshi operate across all 50 states, while state-licensed retail sportsbooks remain blocked in major states like California and Texas. The answer isn't a technicality—it comes down to two completely different bodies of law.

Sportsbooks: regulated state by state

Traditional sports wagering is classified as gambling, which in the United States is governed at the state level. When the Supreme Court struck down the federal ban (PASPA) in 2018 in *Murphy v. NCAA*, it gave each individual state the authority to legalize, tax, and regulate sportsbooks within its borders. That is why state-licensed apps vary wildly from state to state in both availability and how heavily they tax—and limit—winning players.

Prediction markets: regulated federally as derivatives

Event-contract prediction markets are structured legally as financial derivatives, not wagers. They fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC) under the federal Commodity Exchange Act. An exchange like Kalshi operates as a Designated Contract Market (DCM)—the same federal license category used by interest-rate or agricultural futures exchanges.

Because federal commodities law preempts state-by-state gaming boards, a CFTC-designated exchange can offer contracts nationwide. However, that federal derivative wrapper also changes how markets are priced, how liquidity is supplied, and who sits on the other side of your trade.

Why legal structure matters to your bankroll

• Order-book counterparty risk: On an exchange, there is no traditional bookmaker required to post a standard -110 line on every spread, total, and team prop. You can only bet what another trader is willing to post in the order book.
• Active regulatory tug-of-war: State gaming regulators and the CFTC continue to litigate which sports contracts are permissible, meaning market availability and settlement rules can shift mid-season.
• Capital lockup on futures: Buying a season-long contract on an exchange ties up your cash until settlement or forces you to pay the bid-ask spread twice if you exit early in an illiquid market.