Michigan judge rules sports-event contracts don’t fall under CFTC regulation

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The Backstory

States press their case against a federal markets model

The ruling in Michigan lands in a widening fight over whether sports-linked event contracts are financial derivatives or sports wagers. Prediction market operators have argued that contracts tied to game outcomes belong under federal commodities law because they are listed on platforms regulated by the Commodity Futures Trading Commission. State gambling regulators have countered that the products function like online sports betting and should be subject to licensing, taxation, integrity monitoring and consumer-protection rules.

That dispute has moved quickly from regulatory letters to federal courts. The Michigan Gaming Control Board had already urged the CFTC to scrutinize sports event contracts, arguing they were equivalent to internet sports betting under Michigan law. In its letter, the agency said unlicensed offerings could undermine the state’s framework for background checks, responsible gambling tools, secure fund handling and event-integrity oversight. The regulator also tied the issue to public revenue, noting that regulated sports betting generated more than $20 million in state taxes and fees in 2024 for public services and responsible gaming programs.

Those concerns put Michigan among several states seeking to preserve authority over sports wagering as prediction markets expand into mainstream sports. The core issue is not simply labeling. If these contracts are treated as swaps or futures, federal law could limit state intervention. If they are treated as wagers, platforms would need to comply with state-by-state gambling laws, including licensing and tax obligations that traditional sportsbooks already face.

CFTC moves from restraint toward rulemaking

The CFTC has been trying to build a federal framework while the court battles unfold. The agency recently issued guidance to prediction markets on sports event contracts, warning designated contract markets to assess whether certain products are vulnerable to manipulation. Contracts tied to the actions or performance of a single player were singled out as especially risky because one person could influence the outcome.

That advisory reflected the CFTC’s attempt to balance innovation with oversight. The agency said prediction markets had grown rapidly and reminded exchanges of their obligations under the Commodity Exchange Act and commission rules. It also opened a public consultation on issues including insider information, investor protections and how to handle sensitive markets.

The guidance was followed by a more consequential proposal. The CFTC later set out proposed rules that would allow some sports contracts while restricting others. Under the proposal, contracts tied to final scores, match winners, tournament progress and season performance could be permitted. In-game events, injuries, officiating decisions, physical fights and pre-collegiate sports would be off limits. The proposal also would continue bans on contracts linked to terrorism, assassination or war.

The proposal sharpened the split between federal market regulation and state gambling oversight. Supporters say some sports contracts may produce price-discovery data useful to businesses connected to sports. Gaming interests and state regulators argue the CFTC was not created to serve as a national gambling regulator and that federal approval could let platforms bypass state and tribal rules.

Kalshi becomes a test case for federal preemption

Kalshi has been central to the fight because it has repeatedly asserted that CFTC oversight preempts state gambling enforcement. In Tennessee, that argument won at least temporary support when a federal judge blocked the state’s attempt to halt Kalshi’s sports event contracts. The Tennessee Sports Wagering Council had sent cease-and-desist letters to Kalshi, Crypto.com and Polymarket, ordering the platforms to stop offering and void sports-linked contracts for residents and refund customer deposits.

The Tennessee regulator threatened fines of $25,000 per violation and potential criminal referrals for illegal gambling promotion. Kalshi argued that its CFTC registration placed it under exclusive federal jurisdiction and outside state gambling laws. The court’s temporary order gave prediction markets a tactical win and showed that at least some judges were willing to pause state enforcement while the preemption question is litigated.

Kalshi has taken a similar position in New York. The company sued the New York State Gaming Commission, saying the state’s efforts to police its products amounted to an improper crackdown on federally regulated event-based futures. The lawsuit argued that Kalshi offers financial instruments rather than sports wagers and that state enforcement interferes with federal oversight.

The New York case also illustrates how quickly the industry is moving toward major sports partnerships. Kalshi and Polymarket signed a multiyear partnership with the NHL, gaining access to the league’s data and rights for their platforms. Such deals may help operators present their products as data-driven markets, but they also raise the stakes for regulators worried that prediction markets are becoming sportsbooks by another route.

Regulators focus on licensing, integrity and tax leakage

State regulators have framed their objections around practical consequences. Licensing regimes are designed to screen operators, protect customer funds, require responsible gambling controls and monitor suspicious betting tied to match integrity. If prediction platforms can offer sports products without state licenses, regulators say consumers could lose safeguards that were built into legal sports betting after the repeal of the federal sports wagering ban.

Taxation is another pressure point. Legal sportsbooks pay state and local taxes, licensing fees and, in some jurisdictions, fees tied to responsible gambling or public programs. Prediction markets may not face the same obligations if they operate solely under federal commodities law. That creates a competitive issue for licensed sportsbooks and a budget issue for states that count on regulated betting revenue.

The product design also complicates the policy debate. A contract on whether a team wins a championship can resemble a futures bet available at a sportsbook. A contract on a single player’s performance can look like a prop bet. The CFTC’s own guidance acknowledged that single-player markets can create manipulation risks, while its proposed rules would bar some highly granular or sensitive markets. State regulators view those limits as evidence that the products occupy the same risk zone as gambling.

Court outcomes are beginning to diverge

The legal map remains unsettled because early rulings have not all pointed in the same direction. Tennessee’s temporary order favored Kalshi’s federal preemption theory, at least for now. Other states have continued to argue that sports contracts fall within gambling law, and the article on CFTC guidance noted that an Ohio judge ruled Kalshi’s sports event contracts were subject to state gambling laws.

Nevada has also taken a hard line. The Nevada Gaming Control Board told licensees that it considers sports event contracts to be wagers and that prediction markets would need a Nevada-issued gambling license to operate in the state. That position is consistent with Nevada’s long-standing view that sports wagering is a core state-regulated activity requiring strict oversight.

For platforms, inconsistent rulings create operational uncertainty. A company could be allowed to keep offering contracts in one state while being blocked or threatened with penalties in another. For states, the risk is that a favorable federal ruling for one platform could weaken enforcement efforts elsewhere. For the CFTC, the challenge is to finalize rules that withstand judicial review while addressing concerns that it is expanding its role into sports gambling.

The stakes extend beyond one platform

The conflict is larger than Polymarket or Kalshi. It could define how the U.S. regulates products that sit between finance, gambling and real-time sports data. If courts accept the platforms’ argument, federally regulated prediction markets could become a national channel for sports exposure without the patchwork of state betting licenses. If states prevail, operators would face the same fragmented compliance environment that sportsbooks navigate.

The outcome also matters for sports leagues, data providers, brokerages and retail trading platforms exploring event-based products. Firms such as Robinhood have already faced questions about where trading ends and gambling begins. A broad federal pathway could invite more consumer-facing financial companies into sports-linked markets. A state-by-state gambling approach would slow that expansion and preserve the regulatory perimeter built around legal sports betting.

Michigan’s case is therefore part of a national test of regulatory boundaries. The courts must decide whether post-financial-crisis derivatives law was meant to cover contracts tied to sports outcomes. Regulators must decide whether innovation in event trading can be separated from the consumer and integrity risks associated with wagering. Until those questions are resolved, prediction markets will remain caught between two systems of law that were not designed to govern the same product.