State lawmakers are escalating scrutiny of prediction markets as billions of dollars flow into a fast-growing sector that sits at the intersection of financial regulation and gambling, raising urgent questions about taxation, consumer protections, and federal authority.
- State lawmakers continue to scrutinize prediction markets, viewing them as unregulated gambling that threatens state tax revenues and authority.
- Kentucky has taken early legislative steps to define and tax prediction market activity while avoiding direct federal legal conflict.
- Ongoing legal battles over federal versus state jurisdiction are likely to culminate in a Supreme Court decision shaping the industry’s future.
During a National Council of State Legislators town hall webcast Wednesday, multiple lawmakers framed prediction markets as a growing threat to state gaming regulations and, by extension, legislative authority. While proponents frame the products as financial instruments, many state policymakers view them as functionally equivalent to sports betting - while operating outside state regulatory frameworks.
People typically think of prediction markets as betting, said Mississippi state Sen. David Blount, noting that unlike traditional wagering, these platforms are facilitating buying and selling contracts and fall under federal oversight by the Commodity Futures Trading Commission (CFTC). The organization has filed a growing number of lawsuits as it aggressively asserts primary jurisdiction over event contracts tied to commodities and financial markets, including prediction markets.
That federal posture has triggered a widening conflict with states that have legalized and taxed sports betting in the years since the Supreme Court overturned the federal sports wagering ban in 2018. Blount warned that unregulated prediction platforms threaten to siphon activity away from licensed sportsbooks.
Mississippi in the 1990s became the first Southern state to legalize casino gambling and in 2018 opened the region’s first regulated in-person sportsbooks. It remains one of the nation’s largest gambling markets by per capita gambling revenue.
“Your legal product in your state ... is in jeopardy,” Blount said during Wednesday’s webinar, pointing to the risk of losing taxable revenue to platforms that are not taxed or regulated.
Kentucky takes action
Kentucky earlier this year became one of the first states to pass state-level prediction market legislation, which Rep. Michael Meredith framed as necessary legislative action.
Meredith said Wednesday that the legislature sought to “draw a bright line” between licensed gaming operators and prediction market platforms without immediately triggering a federal legal confrontation. Through recent legislation, the state defined event contracts in statute, restricted licensed entities from partnering with prediction platforms, and imposed a 14.25% excise tax on certain activity - the rate applied to online sports betting revenue.
“We didn’t want to get right in the middle of a legal battle,” Meredith said, citing the CFTC’s claim of exclusive jurisdiction. Instead, Kentucky focused on delineating regulatory boundaries while preparing for broader legal clarity.
That clarity is increasingly likely to come from the courts rather than Congress, lawmakers agree.
Meredith pointed to a growing body of litigation across federal circuits, including cases in the Third, Sixth, and Ninth Circuits, that could ultimately force resolution at the U.S. Supreme Court.
Prediction market legal battles continue
At the core of the dispute is whether prediction markets are legitimate financial instruments or a repackaging of gambling activity. Meredith highlighted existing CFTC rules that prohibit contracts tied to unlawful activity, including gaming, war, and terrorism, categories that some current offerings arguably touch.
“We all had an idea of what we thought swaps and commodity contracts were,” Meredith said. “We didn’t think it was things that were related to sports betting.”
The economic stakes are substantial.
Meredith cited estimates that Kalshi handled $1.8 billion in trading volume during March Madness, including $105.5 million on the men’s National Championship Game, and $358 million on the Super Bowl. Broader projections from Bank of America suggest current trading volumes exceed $3 billion per week, with long-term market potential approaching $1.1 trillion.
Roughly 86% of activity is tied to sports.
Those figures underscore why states are moving quickly despite legal uncertainty. For jurisdictions that rely on sports betting taxes to fund public programs, the migration of bettors to federally regulated platforms represents both a fiscal and policy challenge.
Blount framed the issue in stark federalism terms, arguing regulatory decisions in Washington are sidelining states.
“Why do we have nationwide mobile gambling on any and every subject you can imagine,” Blount said, “when all the states are opposed to this ... and Congress has not passed a law to legalize it?”
Absent congressional action, lawmakers are left balancing legal risk against economic urgency. Meredith advised states to coordinate closely with attorneys general as litigation expands, warning that any legislative move could trigger or require court challenges.
For now, prediction markets remain legal. Until a seemingly inevitable Supreme Court ruling, they are expanding rapidly, attracting billions in trading volume and forcing a fundamental reassessment of how betting, finance, and federal authority intersect in the modern gaming economy.
