CFTC & Prediction Markets:
The Regulatory Landscape
The CFTC regulates US event contract exchanges. Kalshi and ForecastEx are the two CFTC-licensed prediction market exchanges. Federal preemption gives them nationwide access, but some states are challenging this. Here's everything US traders need to understand.
What the CFTC is and why it matters
Commodity Futures Trading Commission
The CFTC is the US federal agency that regulates derivatives markets: futures, options, and swaps. Its jurisdiction comes from the Commodity Exchange Act (CEA). The CFTC regulates the same exchanges where corn futures, oil contracts, and interest rate swaps trade. Event contracts (binary yes/no contracts on future events) fall under the CEA as "commodity options."
Designated Contract Market
A DCM is the highest category of CFTC-regulated exchange. DCMs must maintain financial reserves, segregate customer funds at approved custodians, have rules for market integrity, and report to the CFTC. The CME Group, CBOE, and Intercontinental Exchange all hold DCM licences. Kalshi became the first prediction market DCM in 2023. ForecastEx received its DCM licence in 2024. Polymarket's QCEX received its DCM licence in late 2025.
Segregated accounts at regulated custodians
DCM operators must hold customer funds in segregated accounts at CFTC-approved custodians, typically regulated banks. This means if Kalshi went bankrupt, customer funds would be protected from creditors. This is the same protection standard as futures brokers, and substantially stronger than holding crypto in an exchange wallet.
Resolution disputes and operator decisions
The CFTC regulates the exchange structure and financial integrity: not individual contract resolutions. When Kalshi declined to pay out the Khamenei market in February 2026 (refunding stakes instead), that was an operator decision within their rules, not a CFTC violation. The CFTC sets exchange standards; it doesn't guarantee individual trade outcomes.
How CFTC preemption works — and why it matters
Under the Supremacy Clause of the US Constitution and the Commodity Exchange Act, federal CFTC regulation preempts conflicting state laws. For prediction markets, this means states cannot apply their gambling statutes, money transmission laws, or consumer protection rules to block a CFTC-licensed DCM from operating: because the federal law governing the activity takes precedence.
The October 2024 injunction: the key legal turning point
In October 2024, the US District Court for the District of Columbia granted Kalshi a preliminary injunction against the CFTC's attempt to block political event contracts. The court ruled the CFTC likely exceeded its authority and that Kalshi's political contracts are valid commodity options under the CEA. The injunction effectively validated the federal preemption argument: if the CFTC itself can't block these contracts, states almost certainly can't either.
The preemption doctrine in practice
When Wisconsin filed civil complaints against Kalshi, Polymarket, and Robinhood in May 2026 under state gaming law, Kalshi's defense rests on federal preemption: "We're a CFTC-licensed DCM. State gambling law doesn't apply to us." This argument has not been tested in the courts under the new state-level challenges, but the October 2024 precedent is strong.
Non-CFTC platforms (Polymarket on its main platform before QCEX, Drift Bet, Manifold) cannot claim federal preemption. They must navigate state law independently, which is why some platforms block users in certain states and why Polymarket QCEX explicitly blocks New York residents.
The Kalshi v. CFTC case: what happened and why it changed everything
In 2022–2023, Kalshi applied to the CFTC to list political event contracts: markets on which party would control Congress after the 2022 midterms. The CFTC refused, citing a 2011 rule that excluded "gaming, elections, and terrorism" from event contract eligibility.
Kalshi sued the CFTC in federal court, arguing the 2011 rule exceeded the CFTC's statutory authority and that political event contracts are valid commodity options under the CEA. In October 2024, the court agreed: granting a preliminary injunction that let Kalshi keep its political markets running during the case.
The injunction arrived weeks before the 2024 presidential election. Within days, Robinhood launched election event contracts and Interactive Brokers added ForecastEx. The practical impact was enormous: by Election Day 2024, prediction markets had processed billions in volume and become front-page news.
In May 2025, under President Trump's CFTC leadership, the agency dropped its case against Kalshi entirely, formally ending the federal-vs-Kalshi conflict. The regulatory question at the federal level is now settled: CFTC-regulated prediction markets are legal in the US.
US prediction market regulation — full timeline
What's happening at the state level in 2026
First state civil suit against all major platforms
Wisconsin AG Josh Kaul filed civil complaints against Kalshi, Polymarket QCEX, and Robinhood, arguing they operate as unlicensed gambling platforms under Wisconsin law. This is the first direct legal challenge to federal preemption by a state AG since the Kalshi court win. If Wisconsin courts side with the state, it could trigger similar suits across the country.
Governor Hochul executive order
Governor Hochul directed NYDFS, the Gaming Commission, and the AG to pursue enforcement. Polymarket's QCEX already blocks NY residents. NYDFS is the most aggressive state financial regulator in the US: a formal enforcement proceeding against a DCM by NYDFS would create an important test case for federal preemption.
Governor Pritzker executive order
Pritzker issued an executive order coordinated with Hochul. The Illinois Gaming Board has historically taken a broad view of its jurisdiction. If Illinois pursues enforcement against Kalshi specifically (a DCM), the preemption argument will be directly tested in the 7th Circuit.
CFTC supports preemption; Trump White House is favorable
The Trump-era CFTC has signaled strong support for prediction markets as financial innovation. The CFTC dropped the Kalshi case, declined to restrict Polymarket, and is actively processing new DCM applications (including Novig's). Federal policy is favorable; the risk is state-level challenges working through courts over the next 1–3 years.
Common questions about CFTC regulation
What is a CFTC designated contract market (DCM)? +
A DCM is a federally licensed derivatives exchange: the highest CFTC regulatory category, shared by CME Group and CBOE. DCMs must segregate customer funds, meet financial standards, and report to the CFTC. Kalshi, ForecastEx, and Polymarket QCEX are the prediction market DCMs.
What is federal preemption for prediction markets? +
Federal preemption means CFTC jurisdiction under the Commodity Exchange Act overrides conflicting state gambling or money transmission laws. A CFTC-licensed DCM can operate in all 50 states without individual state licences. The October 2024 court injunction strongly affirmed this.
Is Kalshi safe because it's CFTC-regulated? +
CFTC regulation protects customer funds (segregated accounts at regulated custodians) and ensures exchange integrity, but it doesn't guarantee individual contract outcomes. Resolution disputes (like the Khamenei market) are outside CFTC jurisdiction.
Why do some states still restrict CFTC-regulated prediction markets? +
States like Wisconsin, New York, and Illinois argue CFTC preemption doesn't extend to products they classify as "primarily gambling." These challenges are working through courts. The federal position (CFTC under Trump administration) is strongly pro-prediction market.
More resources
State-by-state status
Which states are open, cautious, or restricted: and the specific regulatory actions in each.
Legal riskInsider trading on prediction markets
What counts as illegal, the Fort Bragg prosecution, and how to stay compliant.
TaxesUS tax guide
How CFTC-regulated event contract profits are taxed at federal and state level.
PlatformKalshi: the CFTC-licensed exchange
Full review of the primary CFTC-regulated prediction market platform for US users.