The wagers that popularized cryptocurrency prediction markets may soon face a ban.

Prediction markets have long sought to position themselves as more intelligent, superior, and beneficial compared to traditional gambling.

Then, the arrival of sports transformed the landscape, achieving what elections, inflation contracts, and policy wagers had not: it introduced scale. This shift turned what was primarily a niche trading activity into a mainstream offering, leading the industry into a precarious identity crisis.

While sports contributed to the popularity of prediction markets, they also rendered them politically susceptible.

On March 12, the CFTC initiated a formal rulemaking process for prediction markets, placing manipulation, oversight, and contract structure under federal scrutiny.

Since that time, Arizona has filed criminal charges against Kalshi, and a Nevada judge has temporarily prohibited the company from operating there without a state license. Massachusetts had already taken action against Kalshi’s sports contracts.

Now, Congress is also taking steps.

A bipartisan coalition of senators is drafting legislation that would prohibit sports bets and casino-style contracts on CFTC-regulated prediction markets, contending that they exploit a legal loophole to circumvent state gambling regulations and infringe upon tribal sovereignty.

It is now evident that the dispute has expanded beyond a few isolated cases.

The industry is confronted with an uncomfortable reality. Its quickest path to expansion has come through contracts that resemble, feel, and are marketed similarly to sports bets. However, its legal defense hinges on convincing courts and regulators that these same contracts fit within the realm of federally regulated derivatives. As sports gained popularity, sustaining that argument became increasingly challenging.

This conflict has evolved from a niche struggle between startups and gaming boards into a national debate regarding whether a business that operates like sports betting can claim the legal privileges associated with financial market law and bypass the state-by-state gambling framework that sportsbooks have invested years and substantial resources in navigating.

What started as a jurisdictional dispute over the regulation of these contracts is now developing into a broader and more perilous issue for the industry: a debate over whether sports prediction markets should exist in their current form at all.

The entire debate hinges on one question: bet or swap?

When the dispute is distilled to its essence, it reveals the primary question that all current and future regulatory efforts are attempting to address: Are prediction markets classified as bets or swaps?

Linda Goldstein, a partner at CM Law, states that the resolution of this question dictates who has regulatory authority over them. If these transactions are deemed bets, they fall under state regulation. Conversely, if they are classified as swaps or derivatives, the CFTC assumes the primary role, she explained to CryptoSlate.

States contend that while the contracts may resemble derivatives in form, they function as wagers in substance. This is particularly true in cases where there is no credible commercial hedging purpose, and users are merely betting money on the outcome of a game for a payout.

Conversely, operators assert that event contracts have historically been governed by commodities law and that a national market cannot operate effectively if each state is permitted to classify the same federal product as illegal gambling.

This is one of the many factors contributing to the instability of this dispute.

The consumer behavior observed on prediction markets is straightforward and familiar. Individuals wager on uncertain outcomes and receive payouts if they are correct.

The primary contention lies in the abstract legal classification of the contract itself. At the heart of the dispute is a fundamental issue: the same product can be characterized as a derivative by federal regulators and as gambling by the states.

We are currently witnessing a struggle over whether states will retain authority over activities that resemble and operate like gambling, or whether that authority will be absorbed into federal financial oversight. The legal dispute has transcended Kalshi or a specific set of contracts, and is now focused on who governs event-based wagering once it is packaged as a federally regulated market product.

This shifts the debate from a branding issue to a genuine legal conflict over who has the authority to regulate these markets. As sports emerged as the primary use case for prediction platforms, this has evolved into a battle over whether a national sports-betting enterprise can function under commodities law without engaging with the state licensing systems established for sportsbooks.

This is why states such as Utah, Arizona, and Nevada are exerting significant pressure. They are attempting to prevent gambling-like activities from transitioning into a federal framework that they cannot control.

Why product design is crucial for prediction markets

A substantial portion of this issue will be resolved in court. However, the impact of product design is often underestimated.

One reason prediction markets encounter challenges is when they relax their criteria for what constitutes a suitable event contract. The excitement surrounding them can lead to the listing of fast-paced and popular events, as this drives volume.

However, if these products lack precise definitions and indisputable settlement, they can quickly devolve into entertainment wagering.

This means prediction markets may begin to operate like sportsbooks even before regulators take notice. They start to drift in that direction when spectacle and volume overshadow precision, and when contracts are designed for attention first, with settlement relying too heavily on interpretation.

Binary contracts may appear straightforward until users begin to dispute the settlement. A yes-or-no contract is only as reliable as the definition contained within it. Once the terms that define its outcome become flexible, the market begins to rely on subjective judgments, arguments, and ultimately litigation.

Ross Weingarten, a partner and co-chair of the Sports Integrity Group at Steptoe, noted that from the consumer’s perspective, prediction markets operate differently from traditional sportsbooks because users are trading “yes” or “no” positions against one another, rather than against a house.

However, when the question becomes ambiguous, or the answer is unclear, the binary nature of the question is suddenly not so binary.

“We saw an example of this with bets on whether Cardi B would perform at the Super Bowl. She was on stage, but didn’t have a microphone. Did she perform? The answer probably depends on which side of the bet you took. For the prediction markets, bets like this often lead to litigation.”

This is why sports contracts vary significantly in terms of defensibility.

Simple, hard-to-manipulate outcomes are easier to defend, which is why contracts on game winners are so prevalent. In-game props, performance claims, officiating-dependent outcomes, and anything susceptible to insider knowledge or integrity issues are on precarious ground.

This is where the industry’s credibility will be established or undermined. A platform that presents itself as a neutral exchange with transparent order books, clear pricing, independent settlement sources, and robust abuse detection has a stronger claim to federal market status. Conversely, a platform that resembles a bookmaker has a much weaker claim.

The legal question will be settled in court, but the legitimacy question will be determined by the design of the actual product.

States initiated this conflict, but Congress will determine its resolution

States frame this as a consumer protection and public policy issue, and there is validity to that assertion. Licensed sportsbooks operate within a framework designed around age restrictions, responsible gambling funding, integrity monitoring, tax collection, and regulations tailored to each jurisdiction. Prediction markets pose a threat by routing the same activities through a federal channel that circumvents much of that system.

Goldstein is particularly clear about the states’ motivations, stating that it largely revolves around financial interests and competition.

“Event contracts on sporting events account for the vast majority of transactions on prediction platforms like Kalshi and Polymarket, with some data estimating that it could be as much as 90% of the event contracts,” she explained.

“These contracts are directly competing with licensed sportsbooks. Traditional sports betting generates significant tax revenue for the states because the states receive taxes on the gross gaming revenue. The American Association of Gaming has estimated that, since the beginning of 2025, sports betting platforms have lost over $600 million to prediction markets.”

However, states are also insistent on maintaining strict safeguards across all of these platforms. Goldstein noted that prediction markets circumvent many of the protections designed to safeguard consumers, such as age verification, oversight of game integrity, and mandatory contributions to gambling funds.

The American Gaming Association has made this argument explicitly, accusing sports-related prediction markets of evading the state-based system that legal sports betting was built upon. The leagues are also adapting in real time. MLB’s agreement with Polymarket and its memorandum with the CFTC regarding integrity cooperation signify an acknowledgment that these markets have grown too significant to overlook.

The developments in Arizona and Nevada illustrate the seriousness of the situation. Arizona’s criminal case has escalated the dispute beyond the familiar realm of cease-and-desist letters into prosecutorial action. Nevada’s restraining order indicates that at least one court, for the time being, is willing to classify these products as unlicensed sports pools under state law. Both actions aim to compel the industry back under state control before federal market law solidifies into a permanent workaround.

However, Weingarten pointed out that not all courts agree that sports event contracts constitute unlicensed sports betting subject to state law.

“Some courts have agreed; others have not,” he told CryptoSlate.

“Courts in New Jersey, California, and Tennessee have determined that the contracts qualify as ‘swaps’ under the Commodity Exchange Act. But courts in Maryland, Nevada, Massachusetts, and Ohio have emphasized the historical role of states in regulating gambling. Consequently, the regulation of prediction markets is very much in flux.”

This is why the ultimate outcome is unlikely to yield a clear endorsement or a straightforward prohibition. The CFTC has asserted that it believes it has exclusive jurisdiction over prediction markets like Kalshi and Polymarket, while states continue to assert their regulatory authority.

However, the latest developments in this narrative are more significant than all of this, as they broaden the backlash beyond individual states. The bipartisan bill introduced on March 23 proposes that sports and casino-style contracts should be excluded from federally regulated prediction markets altogether.

This presents a far more precarious scenario for the industry because it undermines one of its fundamental assumptions: that if prediction markets prevail in the federal versus state debate, sports contracts will endure.

This alters the landscape in a more profound manner. The industry will no longer need to be concerned about whether courts will classify sports contracts as gambling under state laws, but rather whether Congress will determine if they should be permitted on regulated prediction markets at all.

The final outcome is now a struggle over categories, not merely jurisdiction. States are litigating, the CFTC is drafting its own regulations, and lawmakers have concluded that certain event contracts should not be permitted in the first place.

This is why the most likely resolution will be a hybrid framework, characterized by stricter federal regulations, increased category restrictions, heightened surveillance requirements, greater emphasis on contract clarity, and more stringent expectations regarding how these products are marketed.

Platforms may continue to refer to themselves as exchanges, but they will need to substantiate that claim through the manner in which they design, settle, monitor, and present their contracts.

This is not a fleeting issue in a niche product that will dissipate in the next cycle, as prediction markets are here to stay. We are at the onset of a foundational struggle over the boundaries between finance and gambling, and this process could extend for years.

Prediction markets captured their broad audience by aligning more closely with sports betting. Now they must confront the question that their success has raised: can they retain that audience while convincing courts, regulators, and the public that they remain something distinctly different?

The post The bets that made crypto prediction markets popular could now be banned appeared first on CryptoSlate.