Prediction Markets Are Colliding With Sports Law and Exchange Power

Prediction markets have become one of the fastest-growing fronts in US trading, and sports contracts are now at the center of a legal fight over regulatory control.On July 31, New York sued in state court, seeking more than $36 billion in damages and an order barring the exchange from offering event contracts nationwide. On August 11, the Commodity Futures Trading Commission responded with emergency authority after Kalshi notified the agency of a market emergency, arguing federally regulated derivatives markets require national treatment.On August 12, the New York City Council opened an investigation into the marketing practices of several prediction-market companies, including Polymarket, Kalshi, Coinbase and Gemini Titan, examining allegations involving young users, influencer marketing and misleading promotions.CME has also sued the over its approval of perpetual futures for Kalshi and Coinbase, alleging competitive injury from rules opening new products to rivals. Indeed, exchange competition, sports law and federal preemption are increasingly overlapping the same market.BeInCrypto spoke with Fernando Lillo Aranda, CMO at Zoomex, and Federico Variola, CEO of Phemex, about regulatory classification, the role of sports contracts, retail safeguards and growing competition between exchanges.The Product-Specific Legal BoundaryUS law gives the CFTC authority over designated contract markets, while sports contracts have created a difficult boundary with state gambling law. In June, the CFTC proposed a new framework for event contracts involving gaming and other enumerated activities under the Commodity Exchange Act. The proposal would allow a 90-day review and assess products case by case using public-interest factors.Court rulings remain divided:The Third Circuit sided with Kalshi in its dispute with New Jersey, ruling that federal law preempts the state’s attempt to block the exchange’s event contracts.Judges in Nevada, Maryland and Ohio allowed state gaming authorities to continue enforcement actions against Kalshi while the underlying legal disputes proceed.A Tennessee court also ruled in Kalshi’s favor, leaving a federally regulated market subject to different judicial interpretations across states.One way to draw the line is by looking at what the contract is actually used for:Contracts linked to payroll data, inflation or commodity prices fit within derivatives markets because businesses and investors can use them to manage financial risk; Sports contracts have a different purpose, with most participants trading based on the outcome of a game rather than hedging an existing exposure.Kalshi operates as a CFTC-regulated designated contract market, while sportsbooks fall under state gambling laws. Although many retail users approach both products in similar ways, the legal framework remains different.Retail Protection Depends on Education as Much as RegulationFernando Lillo Aranda, CMO at Zoomex, believes prediction markets can protect retail users without restricting access. He argues that exchanges should focus on transparency, market integrity and helping users understand the products they trade. “The priority should be transparency, fair market design, and clear risk disclosure. Ultimately, the objective should be to empower users through knowledge rather than limiting innovation.” Lillo Aranda also says sports, politics, weather and live-event markets present additional risks around manipulation, misinformation and emotionally driven trading because many newcomers approach them as entertainment rather than financial products. “Many first-time participants approach prediction markets as entertainment rather than as financial products with real risk. Financial literacy is one of the strongest forms of consumer protection. Well-regulated prediction markets can coexist with strong user safeguards if exchanges combine transparency, responsible product design, and continuous education with high standards of market integrity.” Exchange Competition Within the Regulatory DebateFederico Variola, CEO of Phemex, believes the legal disputes extend beyond consumer protection and into competition between exchanges. “Perpetual futures and event-based contracts have emerged as some of the most successful and prominent financial instruments in recent years, and controlling access to these products is obviously extremely lucrative.” Variola says established exchanges and newer platforms are increasingly competing over who gets to offer these products, with regulation becoming part of that battle. “We have seen platforms such as CME and Kalshi rely on regulation to maintain a degree of exclusive access to certain products. At the same time, there is a strong push toward decentralization from platforms such as Hyperliquid, Lighter, and others.” The commercial incentives are substantial. CME says its event contracts surpassed 100 million trades within eight weeks of launch, while Coinbase has integrated Kalshi’s event contracts into its own platform. At the same time, CME has challenged the CFTC in court over approvals allowing Kalshi and Coinbase to offer perpetual crypto futures, arguing the regulator unfairly expanded access to competing products.Variola expects centralized and decentralized exchanges to continue developing in parallel rather than one replacing the other. “I believe the decentralization of these products is important, particularly because they have already become familiar to the vast majority of crypto users. I hope future regulators take this into consideration when deciding how these instruments should be approached.” A Fight Over Market DefinitionPrediction markets have become a test of how US regulators classify event contracts. Sports contracts present the most difficult example because one product can trade on a regulated exchange while attracting users for reasons associated with sports betting.Competition between exchanges adds another element. CME, Kalshi, Coinbase and decentralized platforms are all seeking a share of the event-contract market, while state gaming authorities continue to defend their licensing and consumer-protection powers. Each regulatory decision influences both market access and the balance between federal and state oversight.Future rules are likely to focus on individual contract types, supported by consistent settlement standards, market-surveillance requirements and consumer protections suited to each category. Sports prediction markets have grown into a significant segment of the derivatives industry, giving these decisions lasting importance for exchanges, regulators and market participants.