Prediction markets are legal in the United States when they operate under federal oversight from the Commodity Futures Trading Commission rather than being treated as gambling. Platforms such as Kalshi are regulated as derivatives exchanges, allowing users to trade event-based contracts under strict rules.
Why it matters: As prediction markets grow and attract institutional interest, regulators are being forced to clarify where betting ends and financial trading begins.
The question has taken on new urgency after Kalshi, the first federally approved prediction market in the US, began seeking regulatory approval to introduce margin trading — a move that could transform prediction markets into tools used by hedge funds and other large investors.
Are Prediction Markets Legal in the US?
Yes, prediction markets are legal in the US if they are regulated by the Commodity Futures Trading Commission (CFTC). The legal distinction hinges on whether event-based contracts are treated as financial derivatives rather than gambling wagers.
Platforms that operate under CFTC oversight must comply with federal commodities law, including reporting requirements, market surveillance, and restrictions designed to prevent manipulation and insider trading.
Unregulated platforms, or those operating offshore, fall into a legal grey area and may not be permitted for US users.
How the CFTC Regulates Prediction Markets
The CFTC oversees derivatives markets in the US, including futures, options, and swaps. In recent years, it has extended its authority to event-based contracts that allow traders to speculate on real-world outcomes.
Under this framework, prediction markets are treated as financial instruments rather than games of chance. The rationale is that these contracts can be used for hedging, price discovery, and risk management — not just entertainment.
The regulator has taken a lighter-touch approach under its current leadership, withdrawing earlier proposals that would have banned political and sports-related event contracts while signaling that clearer rules are coming.
What Is Kalshi and Why Is It Legal?
Kalshi became the first prediction market exchange to receive federal approval in 2020. Four years later, it was cleared to operate its own clearinghouse, allowing trades to be settled directly under CFTC supervision.
Until now, all positions on Kalshi have been fully collateralized, meaning traders must put up the full value of a contract upfront. This requirement has limited participation from large financial institutions that rely on leverage to deploy capital efficiently.
Why Kalshi Wants Approval for Margin Trading
Margin trading allows investors to post only a fraction of a contract’s value, settling the full amount when the contract expires. This structure is standard in futures markets and widely used by hedge funds.
Kalshi argues that without margin, prediction markets lack the liquidity and flexibility required to attract institutional capital. If approved, margin trading would likely be offered initially to institutional investors rather than retail users.
Supporters say this could accelerate the evolution of prediction markets into legitimate financial instruments. Critics warn it could increase risk and blur the line between speculation and gambling.
Prediction Markets vs Gambling — What’s the Difference?
The legal distinction between prediction markets and gambling rests on intent and structure.
Gambling is typically based on chance and entertainment, while prediction markets are framed as tools for forecasting and hedging. Contracts are standardized, prices fluctuate based on information, and participants can exit positions before expiration.
Regulators argue that when structured correctly, prediction markets function more like derivatives than bets — even if the outcomes resemble wagers on elections or sports.
How Margin Trading Could Change Prediction Markets
Allowing margin trading would mark a pivotal shift. Institutional participation could boost liquidity, tighten pricing, and increase the influence of professional traders.
At the same time, regulators are wary of manipulation, especially after reports that some traders may have profited from inside information on past event contracts.
In response, Kalshi has announced new surveillance and audit measures aimed at reassuring regulators and investors alike.
What Happens Next?
It remains unclear whether the CFTC will approve Kalshi’s request or how quickly new rules for prediction markets will emerge.
What is clear is that prediction markets are no longer niche platforms for election-night speculation. They are increasingly intersecting with mainstream finance, forcing regulators to confront difficult questions about risk, oversight, and the future of event-based trading.
Frequently Asked Questions
Are prediction markets legal in all US states?
Federally regulated prediction markets can operate nationwide, but access may still depend on platform-specific rules and compliance requirements.
Is Kalshi legal to use in the US?
Yes. Kalshi operates under CFTC oversight and is currently the only fully regulated prediction market exchange in the US.
Are prediction markets considered gambling?
Regulators classify regulated prediction markets as financial derivatives, not gambling, when they meet specific legal and structural criteria.
Can hedge funds trade on prediction markets?
Hedge funds can trade on regulated platforms, but wider participation may depend on whether margin trading is approved.