The rapid growth of event contracts — financial instruments that allow parties to speculate on or hedge against the outcome of real-world events — has introduced a compelling frontier at the intersection of financial innovation and regulatory scrutiny. These contracts, also known as prediction market derivatives, enable traders to wager on two-outcome outcomes (will the Republican or the Democrat win the next election? Will Seattle receive more than an inch of rain this week? Will Shohei Ohtani hit a home run today? Will Meta's corporate earnings for the year be higher than last year's?) or variable payouts tied to measurable metrics like GDP growth, commodity prices, or football scores. Unlike traditional derivatives, which are typically tied to financial assets, event contracts derive their value from nonfinancial occurrences, blurring the lines between investment vehicles and speculative gaming.
As platforms facilitating peer-to-peer trading on real-world outcomes expand in scope and scale, the resulting asset class presents both significant business opportunities and legal uncertainty. Regulatory treatment of these instruments varies widely: They may fall under federal derivatives oversight, e.g., the Commodity Futures Trading Commission (CFTC), jurisdiction for swaps or futures, be classified as illegal gambling under state law, or even trigger criminal liability under anti-wagering statutes like the Wire Act. For companies seeking to engage in this evolving market, a thorough understanding of the fragmented regulatory framework — spanning federal derivatives law, state gaming statutes, and applicable criminal provisions — is essential to managing risk and capturing long-term value.
Moreover, the rise of blockchain-based prediction markets and decentralized finance (DeFi) platforms has further complicated the landscape, as these technologies challenge traditional enforcement mechanisms. Policymakers worldwide are grappling with whether to embrace event contracts as legitimate risk-management tools or restrict them as unregulated betting products, making compliance strategy a critical differentiator for market participants.
Redefining Prediction Markets: Event Contracts Beyond Traditional Betting
UEvent contracts mark a notable departure from conventional gaming models. Rather than placing bets against a house, participants in these markets take opposing positions on the outcome of specific, verifiable events — ranging from sports results and election outcomes to interest rate decisions and entertainment metrics.
The US market leader, Kalshi, has demonstrated the commercial potential of this model, reporting $249 million in trading volume during the early rounds of the 2024 NCAA Basketball Tournament alone. The instrument's expanding use cases and appeal to retail and institutional users have drawn interest from financial services firms, such as Robinhood, Interactive Brokers, and operators traditionally focused on sports betting, including DraftKings.
What distinguishes event contracts from sports wagering is their positioning as financial instruments — tools for risk management, information aggregation, and price discovery. This framing has enabled platforms to attract a more sophisticated user base and elevate the discourse around these products from gaming to financial innovation.
Federal and State Regulatory Considerations: A Dual-Track Legal Regime
The hybrid nature of event contracts as derivative instruments and betting-adjacent products has resulted in a jurisdictional divide between federal and state regulators. At the federal level, the CFTC treats event contracts as derivatives under the Commodity Exchange Act. Platforms such as Kalshi operate as Designated Contract Markets (DCMs) and are subject to corresponding regulatory obligations, including market surveillance, risk controls, and reporting requirements. However, other federal statutes — including the Wire Act, the Illegal Gambling Business Act, and the Unlawful Internet Gambling Enforcement Act (UIGEA) — may apply if these instruments are deemed wagering activities.
State regulation has emerged as a principal source of legal friction. Several states — including Nevada, New Jersey, Illinois, Maryland, Ohio, and Montana — have issued cease-and-desist letters asserting that event contracts violate their gaming laws. Additional states are actively investigating. Nonetheless, federal courts have generally found that federally regulated event contract platforms are not subject to state gaming enforcement, underscoring the doctrine of federal preemption and the limits of state jurisdiction over CFTC-supervised markets.
Commercial Viability: Revenue Models and Strategic Applications
Event contract platforms generate revenue differently from traditional sportsbooks. They typically monetize through:
- Transaction fees on executed trades
- Market-making spreads
- Licensing of market data
Because these platforms do not take proprietary positions against users, they eliminate the house edge, aligning more closely with exchange models.
Beyond retail speculation, event contracts offer strategic value for institutional users. For example, a company in the entertainment industry may hedge against underperformance at the box office. At the same time, a financial institution might use event contracts to manage exposure to macroeconomic events such as interest rate changes or regulatory actions. These applications reflect a broader trend toward using event-linked instruments as tools for commercial risk management.
Operational Risk: State-Level Enforcement and Cryptocurrency Considerations
While federal oversight offers a structured compliance pathway, state-level enforcement remains a live risk, particularly in jurisdictions with established gaming regimes. Companies seeking to enter this space must conduct a jurisdiction-by-jurisdiction analysis and should not assume immunity from state action, even when operating under federal licensure.
Additionally, platforms such as Polymarket, which use cryptocurrencies, introduce further regulatory complexity. These operations often face scrutiny from financial regulators and law enforcement, particularly when targeting US customers from offshore jurisdictions. The CFTC's $1.4 million settlement with Polymarket and the FBI's investigative actions underscore the seriousness of operating without appropriate licensure or oversight.
Shifting Regulatory Outlook: Federal Policy Under the Trump Administration
The 2024 election cycle has materially shifted the regulatory landscape for event contracts. Industry observers anticipate a more permissive approach to prediction markets with the Trump administration back in power:
- Trump's nomination of Brian Quintenz, a Kalshi board member, as Chair of the CFTC
- The reported engagement of Donald Trump Jr. as a strategic advisor to Kalshi
These signals suggest a possible departure from the enforcement-first approach of the previous CFTC leadership and toward a more principles-based regulatory philosophy. However, the regulatory framework remains unsettled. The cancellation of a scheduled CFTC roundtable on sports-related contracts points to ongoing internal divisions and the absence of a clear policy consensus.
Legal Exposure: Core Risk Categories for Market Participants
The constitutionality of mandatory age verification is likely to be tested in court. Critics assert that requiring identification to access digital content may chill lawful expression and infringe on First Amendment rights. Advocacy organizations, such as the Chamber of Progress and the Electronic Frontier Foundation, have warned that these requirements could create surveillance frameworks vulnerable to misuse. The American Civil Liberties Union (ACLU) has raised concerns regarding discriminatory effects, particularly where facial recognition technology exhibits bias based on race or gender, potentially implicating equal protection claims.
- Federal Compliance Failures: Operating without appropriate registration, such as DCM status, invites CFTC enforcement actions and potential civil penalties.
- State Gaming Violations: Even federally regulated platforms may be subject to state enforcement if courts determine a lack of preemption or find contracts constitute illegal gaming.
- Criminal Statutes: Depending on a court's interpretation of "wagering," event contracts could implicate federal criminal statutes, particularly when combined with cross-state financial activity.
The definitional ambiguity surrounding "gaming" and "wagering" remains a central legal risk. Recent rulings suggest courts are cautious about applying expansive interpretations, but the issue is far from resolved. Foreign operators, in particular, must assess cross-border risk exposure, especially when serving US participants without proper registration or exemption.
The Role of Counsel: Strategic Legal Guidance as a Business Imperative
Given the dynamic and uncertain legal landscape, experienced legal counsel is essential. Sophisticated guidance can help businesses:
- Navigate federal registration processes, including the rigorous requirements for DCM status
- Assess exposure under state gaming laws and develop jurisdiction-specific compliance strategies
- Structure business models and partnerships that mitigate regulatory risk
Counsel with dual expertise in derivatives and gaming law is particularly valuable, as success in this market depends on understanding the interplay between overlapping federal and state frameworks and anticipating how enforcement trends may evolve under shifting political leadership.
Companies exploring opportunities in event contracts should consider the following strategic steps:
- Conduct a comprehensive legal analysis before market entry, with particular focus on federal licensing and state exposure.
- Explore strategic partnerships with federally registered platforms as a lower-risk pathway to market participation.
- Monitor federal regulatory developments closely, especially changes in CFTC leadership and rulemaking priorities.
- Avoid premature entry into legally ambiguous jurisdictions, opting instead for scalable models that can adapt to evolving legal clarity.
Outlook: Regulatory Convergence on the Horizon?
While the event contracts market continues to expand, its long-term trajectory will depend on the resolution of key regulatory tensions. Future federal legislation may ultimately be required to delineate the scope of federal preemption over state gaming laws. In the interim, businesses must operate with caution, leveraging legal expertise to navigate operational risks while positioning for scalable growth.
Event contracts offer a compelling intersection of innovation, commercial utility, and market demand. Yet success in this space depends on more than vision — it requires disciplined execution grounded in legal compliance and risk management.
Companies prepared to align entrepreneurial ambition with regulatory sophistication will be best positioned to capitalize on the market's potential. In this rapidly evolving sector, the difference between first-mover advantage and regulatory setback often hinges on strategic legal planning.
To assess your organization's readiness to enter or expand in the event contract market, consult with experienced counsel capable of advising at the intersection of financial regulation, gaming law, and emerging technologies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
