CFTC's Undefined 'Gaming' Leaves Prediction Markets in Regulatory Limbo

The Commodity Futures Trading Commission (CFTC) has acknowledged that the terms "gaming" and "involve"—which determine whether an event contract can be listed on a federal exchange—are not defined in the statute. On 20 August, CFTC Chairman Michael S. Selig told the agency's Innovation Advisory Committee that this lack of definition leaves contracts "at risk of rejection based upon arbitrary whims or political biases."

The CFTC's regulatory framework for prediction markets hinges on these undefined terms, creating uncertainty for venues seeking to offer event contracts. The agency has proposed rules to define "gaming" and "involve," but until finalized, operators must navigate a patchwork of federal and state oversight.

CFTC: Exchange vs. Sportsbook: Key Structural Differences

The distinction between a prediction market and a sportsbook lies in three core mechanics: price formation, counterparty risk, and settlement.

At a sportsbook, the operator posts and moves odds, acts as the counterparty to every bet, and pays out at locked odds. The house wins what the customer loses. In contrast, an event-contract exchange uses an order book to form prices, matches customers with other participants or market makers, and settles contracts at $1 or zero. The venue should hold no position.

ProphetX CEO Dean Sisun, in a comment letter ahead of the same meeting, argued that a two-sided, peer-to-peer exchange under federal oversight "is not simply another way to package the state sportsbook model." ProphetX LLC is listed on the CFTC register as a designated contract market from 11 June 2026.

Kalshi's explainer notes that its contracts trade between one and 99 cents, settle at $1 or zero, and reflect live probability. A question with a 40% chance of resolving yes should trade around 40 cents.

In an illustrative example, a $1,000 wager at a US sportsbook with -110 odds on both sides would see the book collect $1,000, pay winners about $955, and keep roughly $45. On an exchange, the same $1,000 buys roughly 2,000 contracts at 50 cents, with the venue earning a transaction fee. The bookmaker carries exposure to the event outcome; a neutral exchange does not.

Federal Designation and State Challenges

For a retail-facing US prediction market, the federal route requires designation as a contract market under the CFTC. The Commission's March notice stated that any prediction-market venue offering swaps or futures to the general public must register as a designated contract market.

Novig launched nationally on 4 August after its Ludlow Exchange LLC subsidiary received designated contract market status on 16 June. ProphetX LLC is listed separately as designated from 11 June.

Chairman Selig said the Commission would defend its jurisdiction in court and exercise it. Amendments to Parts 38 and 40, expected soon, would modernize listing rules and add retail protections. The package includes a rewrite of Rule 40.11, which bars contracts involving terrorism, assassination, war, gaming, or unlawful activity. Sisun recommended a conditions-based Section 4(c) framework with categorical standards for settlement, surveillance, and integrity instead of contract-by-contract review.

States, however, continue to claim authority over sports-outcome products offered to residents. The CFTC sees a listed event contract; state gaming regulators see a wager on a sporting event. In Nevada, a court barred Kalshi from serving state residents, and the Nevada Gaming Control Board later accused the company of failing to stop trading from inside the state, seeking $120,000 a day in penalties.

On 28 August, the Ninth Circuit held that Kalshi had not shown the Commodity Exchange Act likely preempted Nevada's gaming regulations for sports event contracts. On 2 September, New Jersey's attorney general asked the US Supreme Court to review whether sports wagers on prediction markets can avoid state sports-gambling laws. The CFTC's prediction-market rulemaking drew more than 1,500 comments.

Convergence of Product Menus

Sportsbook-style products are appearing on federally designated exchanges, while sportsbook operators are exploring the CFTC route. Novig said its first week after national launch produced more than $125 million in notional volume, with parlays roughly a third of activity. DraftKings filed its first event-contract templates with the CFTC in May for DKeX, pursuing the federal route as an alternative to state-by-state licensing.

The CFTC's June proposal would define "gaming" and "involve," set public-interest factors, and treat player-injury and discrete-action contracts as likely contrary to the public interest. Until finalized, firms must classify products by how they actually work.

Brokers and exchanges are exploring listings, distribution, liquidity, technology, or client access as prediction-market volumes grow. The regulatory question is also an operating question: before listing, routing, white-labeling, or promoting event contracts, firms need to know whether the product behaves like a neutral exchange instrument or a wager against the house.

A reusable checklist can help: if the operator posts odds, acts as counterparty, profits from customer losses, and pays out at locked odds, it looks like a sportsbook. If not, it looks closer to an event-contract exchange. Mixed answers require deeper legal review.