After the Third Circuit: What Prediction Market Participants Need to Know Right Now
After the Third Circuit: What Prediction Market Participants Need to Know Right Now
By Alexander Dubin | Law Office of Alexander Dubin | May 2026
On April 6, 2026, the United States Court of Appeals for the Third Circuit issued the first federal appellate ruling on one of the most consequential legal questions in the gaming and financial markets space: whether the Commodity Exchange Act preempts state gambling laws as applied to sports-related event contracts traded on CFTC-registered platforms.
The court ruled 2-1 for Kalshi.
In KalshiEX LLC v. Flaherty, the Third Circuit held that Kalshi's sports event contracts qualify as "swaps" under the CEA, and that the CEA's comprehensive regulatory framework for designated contract markets creates field preemption that overrides state gambling classification. Put simply: if the CFTC has not determined that a contract is contrary to the public interest, state regulators cannot step in and override that implicit federal approval.
It was a significant win for prediction market platforms. And it still might not be enough.
Here is what participants — not platforms — need to understand about where things actually stand.
The Third Circuit Win Is Real, but Incomplete
The ruling is genuinely important. It is the first time a federal appellate court has squarely held that CFTC-regulated event contracts are likely preempted from state gambling enforcement. Combined with the CFTC's January 2026 declaration that it intends to assert exclusive jurisdiction over event contracts, the federal regulatory posture has shifted meaningfully in favor of prediction markets.
But the Third Circuit covers only Pennsylvania, New Jersey, and Delaware. The Ninth Circuit — covering California, Nevada, Washington, and eight other states — has not yet ruled. Nevada's federal district court previously dissolved a preliminary injunction protecting Kalshi's sports offerings, finding that the platform's contracts amounted to an attempt to evade state regulation. Massachusetts state courts have reached similar conclusions, with the Superior Court granting the Attorney General's motion for a preliminary injunction before the Appeals Court intervened on a stay.
Different courts, applying the same federal statute, are reaching materially different conclusions. What that means in practice is that a participant on Kalshi today may be fully protected in New Jersey and simultaneously operating in contested legal territory in Nevada. The platform's legal position and the participant's legal position are not the same thing — and most participants do not appreciate that distinction.
Congress Is Watching: The Prediction Markets Are Gambling Act
In March 2026, Representatives Adam Schiff and John Curtis introduced the Prediction Markets Are Gambling Act — a bipartisan bill that would prohibit federal entities from listing contracts resembling sports bets and return regulatory authority to state gaming commissions. If passed, event contract platforms would need to obtain state gambling licenses in every jurisdiction where they operate.
The bill faces significant opposition from fintech and crypto lobbies, and its passage is far from certain. But its introduction matters for two reasons. First, bipartisan sponsorship gives it more staying power than typical gambling-adjacent legislation, which tends to stall in partisan gridlock. Second, the bill's existence provides state attorneys general with a congressional statement of intent — ammunition they will use in ongoing litigation regardless of whether the bill advances.
Participants should not assume the current federal framework is permanent. The legal landscape for prediction markets is being contested simultaneously in Congress, in federal circuit courts, and in state courtrooms across the country. That is an unusual and genuinely unstable combination.
The Problem Nobody Is Talking About: Participants Are Not Protected
The platform-level legal battles dominate coverage. What receives almost no attention is the legal framework — or lack of one — governing how participants can and cannot behave on these platforms.
Insider trading. Securities law insider trading concepts do not map cleanly onto event contracts. The prohibition on trading on material non-public information in equity markets rests on a well-developed body of doctrine built around corporate disclosures, fiduciary duties, and market integrity principles. None of that doctrine applies neatly to a contract on whether a sports team will win, whether an election will produce a particular outcome, or whether a specific event will occur. The CFTC has anti-manipulation authority over designated contract markets — but that authority has rarely been tested in the prediction market context, and the framework for what constitutes actionable insider conduct remains almost entirely undefined.
Former Kalshi chief regulatory officer Elie Mishory, now advising the SEC chair, published a working paper in April 2026 attempting to build a four-category framework for insider information on event contracts. It is a serious piece of analysis and a useful starting point. But it is a working paper, not a rule. Participants operating on these platforms today are doing so without clear regulatory guidance on where the line is.
Front-running. In thinly-traded prediction markets, the risk of front-running — where a participant with advance knowledge of a large pending order trades ahead of it — is structural. The enforcement posture for this conduct in event contract markets is, again, essentially nonexistent.
The offshore platform distinction. Perhaps the most urgent risk facing U.S. participants is one most of them are entirely unaware of: the legal difference between participating on a CFTC-registered domestic platform like Kalshi and an offshore platform like Polymarket. Kalshi is a designated contract market, subject to CFTC oversight, with participant protections built into its regulatory framework. Polymarket is an offshore platform. U.S. participants on Polymarket face a fundamentally different — and substantially greater — legal exposure profile, regardless of how the Kalshi preemption battles ultimately resolve. The CFTC's jurisdiction, the consumer protections, and the legal recourse available to participants are not the same across these platforms. Treating them as interchangeable is a legal mistake with real consequences.
What Participants Should Be Doing Right Now
The regulatory environment is unsettled, and that uncertainty cuts both ways. It creates risk for participants who are not paying attention — and opportunity for participants who are. Here is a practical framework:
1. Understand which platform you are on and what that means legally. If you are trading on a CFTC-registered DCM, you have a defined regulatory framework and a set of participant protections. If you are on an offshore platform, you do not. That distinction should inform every decision about where you trade and how much exposure you carry.
2. Document everything. In the event of a dispute — with a platform, with a regulator, or with a counterparty — your ability to demonstrate the legitimacy of your activity depends on your records. Trade logs, communications, account statements, and the basis for your trading decisions should be preserved systematically, not reconstructed after the fact.
3. Think carefully about entity structure. Whether you trade as an individual or through a properly structured entity has significant implications for liability, banking access, and regulatory treatment. The right structure depends on your trading volume, your platform mix, and your state of residence — but most participants have not thought about this at all.
4. Get ahead of banking. Banking access remains the single most persistent operational problem for sophisticated prediction market participants, even those operating entirely within the law on CFTC-regulated platforms. Financial institutions are not yet equipped to underwrite prediction market activity, and participants who have not proactively addressed their banking relationships are one account closure away from a serious operational disruption.
A Note on What Comes Next
The Ninth Circuit will rule. The Supreme Court may ultimately take this up. Congress is moving, however slowly. New CFTC rulemaking on event contracts is coming under Chairman Selig. The regulatory picture for prediction markets will look meaningfully different twelve months from now than it does today.
What will not change is the basic dynamic: the legal framework is being built around the platforms. Participants are largely an afterthought. That is where I focus my practice — and why I think the questions above matter more than most participants realize.
Alexander Dubin is the Managing Partner of the Law Office of Alexander Dubin in New York, a boutique practice focused on gaming law, sports wagering regulation, and CFTC-regulated prediction markets. He represents professional gamblers, market makers, prediction market participants, and the companies that work alongside them. If you have questions about your legal exposure on prediction market platforms, you can reach him at alexander@dubin.law or (914)424-6674.
