Hello, and welcome back to Inc.’s 1 Smart Business Story. The Commodity Futures Trading Commission (CFTC) isn’t backing down on its claim of exclusive federal authority over prediction markets like Kalshi and Polymarket, even as states like Nevada move quickly to crack down on them.

States argue these popular platforms are essentially operating like unregulated casinos, bypassing state licensing and regulations. In response, the CFTC has filed legal briefs and made public statements asserting that these event-based contracts are derivatives under federal commodities law, not state-regulated gambling. 

Only time—and the courts—will decide whose claim prevails. But the question remains: Could the fall of these prediction markets be as fast as their meteoric rise? 

In this piece, you will learn:

BY MELISSA ANGELL, SENIOR STAFF WRITER

Billions are at stake for the Kalshis of the world.

The latest battle between the states and the federal government is over prediction markets after the Trump administration came out in favor of them this week. 

Commodity Futures Trading Commission chairman Michael Selig on Tuesday asserted in a legal brief that the CFTC is defending its “exclusive jurisdiction over these derivative markets.” His comments are in response to a slew of lawsuits filed by states, those which claim that prediction markets like Kalshi are bypassing state regulations and licenses to operate, in essence, like an unregulated casino. 

But Selig went one step further on Tuesday, asserting that prediction markets “provide useful functions for society,” while doubling down that prediction market offerings, namely event contracts, are considered commodity derivatives. 

“Prediction markets aren’t new,” Selig said in a Tuesday video posted on X. “The CFTC has regulated these markets for over two decades. They provide useful functions for society by allowing everyday Americans to hedge commercial risks like increases in temperature and energy price spikes.”

It’s true that the CFTC has overseen derivative markets for the past half-century since its creation in 1974. Derivatives are sophisticated financial instruments that derive their value from an underlying asset (think stocks, bonds, commodities, and so on). They’re considered highly risky, in part because investors can control larger financial positions compared with their initial investment.

Kalshi and other prediction platforms expand the ability to bet on everything from who might win this season of Survivor to where bitcoin's price might fall on a specific day. 

But the question here is whether prediction markets resemble derivative markets or, as state regulators have argued, fall more appropriately into the realm of gambling and sports betting. A recent Financial Times analysis shows that roughly 90 percent of Kalshi’s annualized revenue comes from sports trading. 

Sports betting is incredibly lucrative for states, with some drawing hundreds of millions in tax revenue each year. But legally speaking, barely half of the country has access to online sports betting. (As of this year, it’s 30 states and the nation’s capital, according to the Tax Foundation.)

What’s clear is that this isn’t a fight that states are taking lying down. 

In response to Selig’s video, Utah Governor Spencer Cox, a Republican, vowed to unleash every resource at his disposal to fight this in court. 

“I don’t remember the CFTC having authority over the ‘derivative market’ of LeBron James rebounds,” Cox wrote in a post on X. “These prediction markets you are breathlessly defending are gambling—pure and simple.”

Other states, like Nevada, are currently embroiled in litigation against Kalshi, seeking to prevent the prediction market platform from operating in the state without a license. A federal appeals court on Tuesday blocked Kalshi’s attempt at pausing the lawsuit. 

Much is at stake depending on how the courts rule, with billions on the line for the Kalshis of the world. It’s all but certain that this’ll become a matter that ends up before the Supreme Court. 

If states do succeed in asserting authority over prediction markets, it could be game over for Kalshi and others. That’s because patchwork state models aren’t sufficient for prediction markets in operating a business model, according to Kevin Frankel, a partner at Benesch whose practice encompasses prediction markets. 

“It probably means that Kalshi and Polymarket will either immediately be out of business or will have to swiftly get compliant with state licensure and gambling regulations,” Frankel says, later adding that “many of these companies can’t operate other than nationally.”

Read more like this at Inc.com 

Advertisement:

AI stocks. Metals. Crypto.

Surprise, surprise; gold crashed 16%. Silver plunged 34%. Bitcoin dropped to 1 year lows.

All supposedly "uncorrelated" assets moving in lockstep largely because of overleveraged margin.

JPM strategists warn that the same leverage is still a risk.

Those markets may be recovering now, but cascading liquidations could trigger quickly across several asset classes simultaneously.

So much for diversifying away risk, right?

But get this–

70,819 everyday investors have allocated $1.3 billion fractionally across 500+ exclusive investments. 

Not real estate or PE… Blue-chip art. Sounds crazy, right?

Now it’s easy to invest in art featuring legends like Banksy, Basquiat, and Picasso, thanks to Masterworks.

They do the heavy lifting from acquisition to sale, so you can diversify with the strategy typically limited to the ultra-wealthy.

(Past sales delivered net returns like 14.6%, 17.6%, and 17.8% on works held longer than a year.)*

Our subscribers skip the waitlist

_{*Investing involves risk.  Past performance is not indicative of future returns. Important Reg A disclosures: masterworks.com/cd}