Prediction Markets vs Operators: Federal Rails, State Books, and the New Economics of U.S. Betting
- Kevin Jones
- 2 days ago
- 8 min read
CFTC-regulated prediction venues now compete directly with state-licensed sportsbooks, offering national reach, exchange-style pricing and a lighter federal compliance regime. This feature maps the legal split (federal pre-emption vs state police powers), details operator strategies (fight, partner, or own the rails), unpacks the infrastructure (clearing, custody, oracles), and converts regulatory milestones into an actionable trigger matrix. It sets a minimum controls parity bar and a scenarios plan operators can execute today.
A structural fault line has opened across U.S. wagering. On one side sit state-licensed operators, casino and sportsbook brands bound to state-by-state licences, suitability reviews, geofencing, tax remittance and responsible-gambling (RG) regimes. On the other stand event-contract venues “prediction markets” operating under federal commodities rules and clearing infrastructure rather than state gambling statutes. Functionally, both let consumers stake money on real-world outcomes. Legally, they sit in different universes.
That split is no longer academic. CFTC-regulated venues and their distribution partners can reach bettors in states where online sports betting is illegal, position themselves as “trading” rather than “gambling,” and bypass the cost stack that weighs on licensed sportsbooks. For operators, the question is not only competitive: it’s constitutional (pre-emption vs police powers), financial (tax base leakage) and operational (do we ringfence, partner, or fight?).
The engine behind the boom
Prediction venues have adopted the UX, liquidity and fee logic of exchanges: central order books, maker-taker style economics, penny-priced contracts from $0.01–$0.99 that map to implied probability, and continuous trading before (and sometimes during) events. Distribution has been amplified by consumer fintech (brokerages, wallets, payments apps), creating 50-state reach where sportsbooks remain geofenced.
Why the acceleration:
Financialised UX: trade in and out like equities; price discovery is social and continuous, not a one-off fixed-odds bet.
National distribution: app-store discovery and brokerage routing replace state-by-state affiliate funnels.
Crypto/fiat rails: dollar-stablecoin settlement, qualified custody, and clearinghouse-style margining reduce friction and scale risk management.
Catalogue breadth: sports, macro prints, entertainment, and politics (where permitted) broaden addressable engagement beyond sportsbook menus.
Core infrastructure stack (at a glance)
Component | Prediction markets (CFTC rails) | Traditional sportsbooks (state rails) |
Custody & funds flow | Qualified crypto/fiat custody; clearing margin | Payment processors; segregated bank accounts |
Settlement | USDC/fiat T+0–T+1; netted via clearing | Fiat settlement; wallet-style ledgering |
Pricing/data | On-chain oracles + public order books | Official league data + internal pricing |
Oversight | Federal commodities regulator (CFTC) | State gaming commissions/tribal compacts |
Distribution | Brokerages/fintechs + direct apps (national) | Geofenced apps; affiliates; state-limited media |
Operator backlash and the legal front
Licensed operators and state regulators see three problems:
Jurisdiction: if a sports outcome is packaged as a CFTC event contract, does federal law pre-empt state gambling rules?
Consumer-protection asymmetry: age thresholds (18+ vs 21+), RG tooling, marketing controls and investigations differ materially between regimes.
Economic leakage: handle migrates to untaxed venues that make no state contributions and face lighter suitability scrutiny.
State actions (advisories, cease-and-desists, suitability warnings) have been met by venue lawsuits seeking federal injunctions. Courts have split, with some accepting field pre-emption and others holding states may regulate sports-linked contracts. The likely path is appellate collisions and, ultimately, federal clarification (rulemaking, legislation or high-court review).
Bill Miller, AGA (G2E): “They call it innovation. I call it something else. It’s greedy, it’s reckless, and it’s irresponsible.”
Key legal challenges and rulings
Jurisdiction | Case outcome | Regulatory friction |
Nevada | Kalshi granted injunction | State tried to block sports prediction apps |
Maryland | Kalshi lost challenge | Federal pre-emption denied by district court |
New York | ORACLE-style bill proposed | Would restrict event-based markets; high fines |
National | 34 AGs filed amici | Opposing CFTC jurisdiction over sports bets |
CFTC Staff Advisory (Sep 30, 2025): “All sports-related event contracts have been listed pursuant to self-certifications… The Commission has not approved these contracts nor determined whether they constitute ‘gaming’ under Rule 40.11.” (Advisory 25-36, PDF · CFTC press release)
Ohio Casino Control Commission: offering sports event contracts “could threaten the future of operators’ licences” if conducted without state approval. (Industry coverage)
Strategic operator responses (fight, join, or own the rails)
Incumbents are not uniform. Four patterns have emerged:
Operator engagement models
Model | Who does it | Why it makes sense | Latent risk |
Ringfenced partnership with a DCM/DCO via IB/FCM | Sportsbooks, DFS apps | Access non-OSB states; low capex; test demand | Suitability exposure; state blowback; product veto risk |
Own the rails (acquire/build a DCM/DCO) | Scale operators with balance sheets | Control economics + roadmap; hedge regulatory drift | High capex/opex; dual-reg compliance burden |
Distribution gateway (brokerage/wallet routes) | Fintechs | New revenue line, sticky engagement | Reputational and supervisory scrutiny |
Hard-line opposition (lobby/litigate) | Operators with heavy OSB exposure | Defend state licences, tax deals, RG framing | Misses optionality if federal pre-emption hardens |
Operator engagement models (current signals)
Operator | Strategy | Market scope | Regulatory trade-off |
FanDuel | FanDuel Predicts with CME Group; Dec launch announced by CEO | Non-OSB states only | Surrendered NV licence to de-risk |
DraftKings | Acquired Railbird (DCM) | Soft-launched sports | Ringfenced from sportsbook business |
PrizePicks | Became FCM; distributes Kalshi/Polymarket | 38 states (non-sports) | Avoids OSB trigger states |
Robinhood | Routes to Kalshi; building ForecastEX | All eligible states | Venue build invites broker scrutiny |
FanDuel CEO confirmation — Amy Howe announced FanDuel Predicts in partnership with CME Group, launching in December. Framing: expands sports engagement to “about half the U.S. adult population who currently don’t have access to regulated sports betting,” highlights seamless, accessible, trusted UX, and positions it within Flutter’s Q3’25 diversification strategy. (LinkedIn post · CME press release)
Vlad Tenev, Robinhood: “Prediction markets are on track for a ~$300m annual run-rate and are one of the fastest-growing businesses we’ve launched.” (Q3’25 earnings call transcript)
PrizePicks (CEO) & Kalshi (co-founder): “Expanding into prediction markets delivers what our customers want—more ways to play… As of today, people can access Kalshi’s markets within the PrizePicks app. This is a game-changing moment.” (Kalshi newsroom · Sports Business Journal)
Integrity & league posture
NBA to the CFTC: “Protecting the integrity of NBA basketball is our highest priority… guiding our study of sports betting-like products replicated in sports prediction markets today.” (NBA comment letter, PDF)
MLB to the CFTC: urged creation of an “integrity framework” around sporting event contracts as the vertical expands. (MLB comment letter, PDF)
Strategically, operators face hard decisions:
Do you partner with an existing prediction platform or build your own exchange?
How do you structure entities to avoid cross-contamination with OSB licensure?
What product mix (sports vs politics vs macro data) aligns with regulatory tolerance?
Controls parity: minimum bar (use even if not mandated)
Age & ID: 21+ with document verification; no credit-card funding for new users.
RG: self-exclusion reciprocity; default deposit/time limits; frictioned re-activation.
Integrity: prohibited-person lists; suspicious trading alerts to leagues/regulators.
Ads: no “risk-free” language; no college-targeted creatives; auditable probability claims.
KYC/AML: FCM-grade onboarding; wallet screening; SAR procedures for on/off-ramp anomalies.
Global and tribal implications
Tribal sovereignty (U.S.): IGRA gives tribes regulatory primacy on tribal lands. Practical impacts:
Geofencing must recognise tribal boundaries, not just state lines.
Supplier suitability: prediction-venue integrations can trigger vendor-licensing expectations under compacts.
Data & integrity: tribes may require prohibited-person screening and league-grade integrity feeds before allowing distribution.
United Kingdom / EU: clear allocation reduces arbitrage: financial bet-like instruments (e.g., spread betting) sit with the FCA; sports/novelty bets sit with the UKGC. Exchange share remains single-digit—precedent for coexistence if the U.S. narrows catalogues.
APAC / RoW: Singapore has explicit online gambling rules; China is prohibitive; India remains fragmented. Assume gambling treatment by default outside a defined financial-regulatory lane; design entity and data segregation accordingly.
Infrastructure and vendor signals
Prediction venues are stitching together an institutional-grade stack that looks little like a PAM-plus-trading-engine sportsbook:
Clearing & margin: portfolio margin, correlated-shock playbooks, daily variation flows akin to futures exchanges.
Custody & settlement: qualified crypto/fiat custody with USDC settlement becoming standard.
Resolution & integrity: deterministic oracles for objective markets; dispute windows for subjective events; prohibited-person screening.
Data distribution: event probabilities emerging as a commercial data product.
Operator implications
Add a commodities-mode account layer (FCM onboarding, margin events, reconciliation).
Treasury/compliance need stablecoin controls (source-of-funds checks, wallet screening, fiat off-ramps).
Negotiate rights to your probability output and attribution if you partner/white-label.
Vendor opportunity assessment
Category | What to build | Why operators care |
PAMs / account platforms | Modules bridging sportsbook KYC/RG with FCM/DCM onboarding & suitability | Single customer view; harmonised controls; faster pivots between regimes |
Integrity & resolution | Dual-track feeds (league integrity + deterministic oracles); prohibited-person screening | Close the integrity gap; defend partnerships with leagues and states |
Clearing & risk tech | Simplified risk waterfalls; cross-margin with correlated markets | Lower collateral drag; better liquidity at launch |
Payments / custody | On-/off-ramp for USDC/fiat with RG controls and age-proofing | Reduce frictions without compromising compliance |
Data distribution | Normalised event probabilities + explainability | New B2B revenue; aligns marketing and risk teams on a “truth feed” |
Forward flashpoints
Trigger | What could happen | Impact | Action now |
CFTC finalises 40.11 “gaming” scope | Narrows/blocks sports & politics contracts | Catalogue shrinks; venues pivot to macro/econ | Pre-draft alternate catalogue; comms plan |
3rd/4th/9th Circuit rulings | Circuit split or uniform stance | Split → SCOTUS; uniform → immediate state/federal moves | Update go/no-go by state; ringfence entity exposure |
State “ORACLE-style” laws | Fines, ads limits, 21+ requirement | Raises cost of parity; enforcement risk | Adopt controls parity; audit ads |
Tribal injunctions | Mandatory tribal geofencing | Distribution gaps in key states | Implement tribal-layer geofencing; update ToS |
Integrity scandal | Insider trading/match manipulation | Emergency market suspensions; league pressure | Prohibited-person screening + incident runbooks |
League posture change | Formal partnerships or bans | Data access or trademark constraints | Pre-negotiate integrity/data terms with leagues |
Milestone timeline (2019–2026)
How to read this: sequence of pivotal actions across regulators, courts, operators, and distributors that shaped today’s landscape. Use this to align product/legal sprints with external events.
Date | Milestone | Vector | Why it matters |
2019–2022 | PredictIt no-action letter revoked → litigation begins | CFTC / Courts | Opens the modern legal fight over event contracts and administrative process |
2023 | Injunction lets PredictIt continue pending review | Courts | Signals courts will scrutinise CFTC reversals; foreshadows later venue injunctions |
Early 2025 | CFTC pressure halts a Super Bowl futures listing attempt | CFTC / Venue | Illustrates Commission willing to draw lines around marquee sports events |
Mid 2025 | PrizePicks registers FCM; integrates Kalshi markets in-app | DFS / Venue | Shows a compliant on-ramp for consumer fintech distribution across many states |
Mid–Late 2025 | State pushback (e.g., suitability letters; C&Ds) escalates | State regulators | Raises operator licence risk for any association with sports event contracts |
Sep 30, 2025 | CFTC Staff Advisory: sports event contracts self-certified; not approved; “gaming” undecided | CFTC | Clarifies legal uncertainty; heightens venue and intermediary risk disclosures |
Oct–Nov 2025 | Court splits emerge: preliminary injunctions (NV/NJ); adverse ruling (MD) | Courts | Confirms fragmented case law; sets stage for appellate collisions and possible SCOTUS |
Nov 2025 | FanDuel CEO announces FanDuel Predicts with CME (Dec launch) | Operator | Validates operator entry via federal rails; emphasises non-OSB state reach |
Late 2025 | NY “ORACLE”-style proposal surfaces | Legislature | Template for state-level parity rules, fines, and catalogue limits |
Regulatory scenarios (plan against all three)
Scenario | Description | Likely effects | Operator posture |
A. Durable pre-emption | Courts protect parts of the catalogue on CFTC rails | National reach survives; states focus on ads/integrity | Launch ringfenced prediction with controls parity |
B. Hybrid split | Macro/politics on CFTC rails; sports revert to state | Sports prediction narrows; DFS hybridisation rises | Keep non-sports prediction; add exchange features to OSB |
C. State pushback wins | Sports event contracts curtailed; venue growth slows | Exchange remains niche; parity rules expand | Pivot to OSB/exchange features; pause sports prediction |
Prediction markets are not a curiosity at the edge of gambling; they are a parallel distribution and regulation stack with credible scale economics and very different obligations. If federal pre-emption hardens, operators face a competitor in every “closed” state and a powerful new class of data publishers. If states (and tribes) hold the line, catalogues will narrow and the exchange model will settle into complementary, finance-adjacent niches.
Either way, treat prediction markets as a product, a compliance posture, and a data strategy problem, not just a legal debate. Build optionality now—entity architecture, controls parity, integrity plumbing, so you can move whichever way the next ruling breaks.
Glossary
DCM/DCO/FCM — Exchange / clearing house / futures commission merchant.
Rule 40.11 — CFTC rule that can block event contracts “contrary to the public interest,” including “gaming.”
Pre-emption — Federal law overriding state law (commodities vs gambling).
IGRA — Indian Gaming Regulatory Act—governs gaming on tribal lands.
Controls parity — voluntarily matching state RG/integrity standards on CFTC-rail products.
