Prediction Markets Are Sports Betting — And the Federal Government Is Looking the Other Way

February 18, 2026  |  By Kevin Vela

At VW, we’re proud to represent dozens of gaming companies. I’ve personally been deep in the fantasy sports community for over 10 years, and it’s been fun and intellectually stimulating to watch the evolution of DFS, DFS 2.0, and sports betting during that time. A constant thread has been a complex legal framework for operators — set by states. If you want to offer sports betting in New York, you can, but the taxes are going to be expensive. If you want to broadly offer DFS 2.0, you can in most states, subject to ongoing state-by-state regulation and refinement. The complexity and moving targets have been challenging, but they have been set at the state level,  as they should be, consistent with the Tenth Amendment of the Constitution.That started to change in late 2024, when a federal appeals court ruled against the Biden Commodity Futures Trading Commission (CFTC) and cleared the way for Kalshi, a prediction market platform based in New York City, to offer election contracts. The Biden administration had fought that case — this wasn’t a gift from the prior administration. But when Trump took office, the new CFTC dropped its appeals, withdrew proposed rules that would have restricted sports contracts, and made clear it had no interest in standing in the way. In this post, I’m going to explain the problem. In my next one, I’ll focus on what this means for smaller, traditional operators in the space.

PASPA Created a Convoluted State-Led Framework

When the Supreme Court struck down the Professional and Amateur Sports Protection Act (PASPA) in 2018, it handed the states the authority to legalize and regulate sports betting. From scratch, states built licensing frameworks, tax structures, integrity safeguards, age verification requirements, and responsible gambling programs. They negotiated with professional leagues, tribal gaming operations, and operators to get it right. This wasn’t fast or cheap. In the states that have legalized sports betting, the process took years of legislative work and agency rulemaking. Operators like DraftKings and FanDuel have invested heavily in compliance infrastructure, paid meaningful licensing fees, and continue to pay taxes that flow to state budgets and public programs. Smaller operators did the same thing in proportion, because that was the law, and building a legitimate long-term business means playing by the rules of the jurisdiction you’re in. The fantasy sports industry went through its own version of this, and VW was in the thick of it. After the attorney general opinions, the state-by-state legislative fights, and the skill-vs.-chance debates, operators built their businesses inside those frameworks because they had no choice — and, frankly, because it was the right thing to do. You want to operate in a state? You play by that state’s rules. That principle has been the foundation of gaming law in this country for decades. The Tenth Amendment reserves to the states powers not delegated to the federal government, and gambling regulation has always been one of them.

Enter Prediction Markets — and a Convenient Court Ruling

Kalshi and Polymarket are prediction market platforms. The premise is that users aren’t “betting” — they’re trading event contracts on real-world outcomes. These are yes/no questions, priced between $0 and $1 based on market probability. For a while, they stuck to elections and economic events, and the argument that these were commodity derivatives regulated by the CFTC — rather than gambling products regulated by states — was at least debatable. Actually, this wasn’t the first time someone tried to thread that needle. PredictIt launched in 2014, owned by Victoria University of Wellington in New Zealand and operated by a for-profit company called Aristotle Inc. The nonprofit academic wrapper was deliberate — it was specifically structured that way to obtain a CFTC no-action letter, which allowed it to offer political event contracts to U.S. users without registering as a derivatives exchange. The restrictions were tight: an $850 position limit per contract, a cap of 5,000 traders per market, and no sports. It worked, in a limited way, for years. The Biden CFTC pulled the letter in 2022, saying Victoria University had stopped complying with the terms. PredictIt sued, won an injunction, and kept operating. The Trump CFTC settled the case in 2025, loosened the restrictions, and Aristotle eventually got full Designated Contract Market  approval. PredictIt is still around — just no longer the only game in town, and no longer pretending to be a nonprofit research project. The point is that the “event contracts aren’t gambling” argument didn’t come out of nowhere. It was incubating for a decade inside a deliberately constrained academic framework. Kalshi and Polymarket took that same argument, stripped out the nonprofit fig leaf, added sports, and went national. That debate ended when these platforms started offering sports. In January 2025, Kalshi launched sports event contracts — live, second-by-second wagering on game outcomes, prop bets, and parlays — available in every state, including California and Texas, where sports betting is not legal. The NFL said publicly that what Kalshi was offering was “identical to traditional sports betting.” If you can bet on whether the Cowboys cover the spread, which player scores first, and what happens quarter by quarter — live, on your phone — that’s sports betting. Calling it an event contract doesn’t change what’s inside.So how is it legal? In late 2024, a federal appeals court ruled in Kalshi’s favor, finding that its contracts didn’t constitute “gaming” under the Commodity Exchange Act — the federal law governing derivatives markets — in the same way traditional gambling does. That ruling, combined with a new administration that had every reason to be friendly to prediction markets, opened the floodgates. The CFTC, under its new leadership, cleared the way for these platforms to operate nationally, including in states that specifically chose not to legalize sports betting. One court ruling and a change in federal posture overrode years of state-level work.

The Conflict of Interest Is Not Subtle

Donald Trump Jr. is on the board of Polymarket, and his venture capital firm has invested in the company. He is simultaneously a paid strategic adviser to Kalshi — Polymarket’s direct competitor. The president’s own social media platform, Truth Social, is planning to launch its own prediction market called Truth Predict. Polymarket is backed by Peter Thiel’s Founders Fund and received a nearly $2 billion investment from Intercontinental Exchange — the NYSE’s parent company — whose CEO is married to Kelly Loeffler, Trump’s Small Business Administration administrator. None of this is speculation. These are reported facts from NBC News, NPR, the Wall Street Journal, and Fortune. The Trump family has direct financial stakes in the two dominant prediction market platforms while the federal regulatory environment has been actively clearing obstacles for those same platforms. The new CFTC chairman — Michael Selig, nominated by Trump in October 2025 and confirmed in December — spent his first public remarks withdrawing a proposed rule that would have banned political and sports event contracts, rescinding a staff advisory cautioning operators about sports contracts. He pledged to defend the CFTC’s “exclusive jurisdiction” over event contracts in federal court against the states trying to enforce their own laws. It goes further: Selig has since appointed Alex Titus — a former employee of the Trump Super PAC America First Action — as his chief adviser. The Trump administration also dropped an active investigation into Polymarket that the Biden administration had been pursuing. To put numbers on it: when Trump Jr. joined Kalshi as a paid adviser in January 2025, Kalshi was valued at roughly $500 million. By December 2025, it was valued at $11 billion — a 22x increase in under a year. When his firm 1789 Capital invested in Polymarket in August 2025, the platform was valued at $1 billion. By February 2026, it was valued at $9 billion. We charted the full valuation timeline.

To be fair, some of that growth reflects something real; Texas and California alone represent tens of millions of sports fans who can’t legally place a bet through a state-licensed sportsbook, and prediction markets are the first product to reach them at scale. The demand was always there — it just needed a federal framework willing to unlock it. Trump Jr. holds no disclosed equity in Kalshi — that role is a paid advisory position. His equity exposure is through 1789 Capital’s Polymarket stake, where “double-digit millions” invested at a $1 billion valuation is now worth an estimated $80-$150 million on paper.

I’m not saying the legal arguments prediction markets make are wrong because of who’s backing them. Legal arguments stand or fall on their own merits. But the notion that there will be meaningful federal pushback on this industry while the president’s family holds financial stakes in its two dominant players is not a realistic expectation. When the regulatory agency overseeing an industry is led by a presidential appointee while that same president’s family profits from the industry’s growth, the industry should take note and ask: how far can this go?

States Are Pushing Back

To their credit, states aren’t rolling over. Massachusetts has sued Kalshi directly. Eight other states — including New York, New Jersey, and Maryland — have sent cease-and-desist letters alleging Kalshi is operating an unlicensed sports gambling platform. Tribal nations, which have carefully negotiated gaming compacts and sovereign rights, have petitioned the CFTC and filed suit to protect their authority. As of early 2026, Kalshi alone is facing roughly 20 federal lawsuits. Courts have split on the central question; A D.C. federal court said election betting isn’t “gaming” under the Commodity Exchange Act, but courts in Maryland and Massachusetts have gone the other direction on sports contracts. This will play out in litigation for years, and it’s possible it eventually reaches the Supreme Court. While the lawsuits churn, the platforms are growing fast. More than $6 billion a week is now being traded on Kalshi and Polymarket combined — up over 1,000% from the Biden years. They have partnerships with CNN, CNBC, the Wall Street Journal, Google, Robinhood, and MLB. Chairman Selig has signaled the CFTC may intervene in state court cases to assert federal jurisdiction, meaning states fighting to protect their own frameworks may soon find themselves litigating against the federal government, not just the companies.

This Is a Small Business Problem Too

The conflict of interest story gets most of the attention, but there’s an injury here that deserves equal focus and is of great concern to me: this shift is bad for small gaming operators.

The prediction market framework operates through something called a Designated Contract Market (DCM) — a federally registered derivatives exchange. Kalshi has one. Polymarket acquired one. Getting your own DCM designation requires demonstrating compliance with 23 federal core principles, maintaining a full-time chief regulatory officer, building out market surveillance systems, establishing clearing arrangements, and proving to the CFTC that you have more than 12 months of operating expenses in reserve before your 180-day review even begins. In practice, the process takes years and millions of dollars. Gemini — a well-funded crypto company — applied in 2020 and got its DCM license in December 2025. Five years.

Small operators can’t do that. And the alternative — partnering with Kalshi as an introducing broker — means you’re not a competitor. You’re a distribution partner for the incumbent.

Meanwhile, the state-based licensing framework, for all its complexity, has a genuine on-ramp for smaller businesses. A new DFS operator can get licensed in Colorado for as little as $350 if they have fewer than 7,500 users. Alabama charges $1,000 for operators under $10 million in revenue. Arizona’s DFS license is $2,000 for two years. Across 18 states, DFS operates without any licensing requirement at all. We track all of this in our Fantasy Sports Legislation Tracker and ourSports Betting Tracker. State licensing scales with your business. DCM registration doesn’t.

That said, there are operators in this space — ones we know and respect — who have the scale and resources to pursue the DCM path, and we understand why. The playing field shouldn’t have been tilted this way, but adapting to the environment you’re in is just smart business.

Where This Goes

This will play out in the courts for the next few years. The question of whether the Commodity Exchange Act preempts state gaming law for sports event contracts is working through the federal circuits. The Murphy v. NCAA precedent — the Supreme Court decision that gave states sports betting authority in the first place — is going to be a key argument for the states, and some judges have already cited it. Congress could weigh in, but that’s a long shot given the current political environment and who has the administration’s ear.

If you’re a gaming operator trying to figure out what this means for your business — whether you’re in sports betting, DFS, or looking at the prediction market space for the first time — check out our follow-up piece. We walk through what state licensing looks like across the country, what the DCM path actually requires, and how to think about your options as an operator in 2026.

If you don’t want to wait, reach out directly.

About the Author(s)

Kevin Vela

Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, M&A, fund representation, and gaming law.

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