Prediction Markets

Introduction

Prediction markets, and clashes over whether they mislead consumers and are subject to state or federal regulation, have recently dominated New York sports law headlines. Courts in New York are on the front lines, playing home to high-profile proposed class actions, disputes seeking to enjoin state enforcement of gambling laws and criminal prosecutions alleging expansive bet fixing schemes.

New York Attorney General Letitia James has made the office’s position clear in a recent industry and consumer alert, warning that the Attorney General has the authority to, and will, use New York gambling laws to regulate and prosecute what it characterises as unlicensed sports betting through prediction markets. Of course, prediction market operators have taken the opposite view – that sports-based event contracts offered through their marketplaces are derivative contracts exclusively subject to federal regulation under the Commodity Exchange Act through the Commodity Futures Trading Commission (CFTC).

This fight is playing out as part of the larger struggle to protect the integrity of sporting contests in the face of the relatively nascent legality, and exploding popularity, of sports betting. However, the future of sports-based contracts on prediction markets shakes out, regulators, law enforcement and market participants in New York will no doubt continue to grapple with balancing the demand for this important fan experience against protecting consumers and the integrity of the game.

Setting the stage – prediction markets and event contracts

A prediction market is a marketplace where people can “trade” on future events, including politics, sports, business outcomes and the like. Generally, these marketplaces allow people to buy and sell “contracts” based on predictions of future event outcomes. Kalshi, for example, offers several kinds of event contracts related to technology, health, popular culture, politics, economics and sports. If the user accurately predicts the outcome of an event, the contract pays. Central to the prediction market operators’ position that such exchanges are fundamentally distinct from a sportsbook, and therefore should be subject to different regulatory schemes, is the argument that users enter into contracts with other users on their platforms, rather than with a “house” – a position being challenged in New York courts.

The regulatory issue – are prediction markets just sportsbooks in disguise?

New York Attorney General position

In 2018, the United States Supreme Court decided Murphy v Nat’l Collegiate Athletic Ass’n, 584 U.S. 453 (2018), opening the door to legal gambling on sports. The Court struck down the Professional and Amateur Sports Protection Act of 1992, 28 U.S.C. §3701 et seq, which had effectively constituted a federal ban on all commercial sports betting. Following that decision, regulation of sports wagering was left up to the states.

Numerous states, including New York, legalised mobile sports wagering in 2021. New York likewise has a body of regulation surrounding sports wagering through the New York Racing, Pari-Mutuel Wagering and Breeding Law, commonly known as the “Racing Laws”. Conducting, advertising and promoting unlicensed sports wagering in New York is a violation of §§ 1367(2) and 1367-a of the Racing Laws. The New York Gaming Commission has jurisdiction over all sports wagering activities in New York State, along with the corporations, individuals and associations involved.

On 2 February 2026, New York Attorney General Letitia James took aim at prediction markets offering sports-based event contracts. Attorney General James crystalised her office’s position on the issue in no uncertain terms, characterising prediction markets as offering “bets masquerading as ‘event contracts’”.

In addition to consumers, the alert puts the industry on notice through warning that “the conduct, advertisement, and promotion of unlicensed sports wagering violate New York’s gambling laws and could be subject to civil and criminal liability”.

In conjunction with emphasising the Attorney General’s power to prosecute entities operating sports wagering businesses in New York without the requisite licensure, in no uncertain terms, Attorney General James characterises sports-based event contracts offered through unlicensed prediction markets as a violation of New York’s Racing Laws. The alert outright states that “[t]he unlicensed offering and promotion of sports-related event contracts constitutes gambling within the meaning of New York Penal Law § 225.00(2)”.

The CFTC position

In stark contrast to New York Attorney General James, the federal regulatory position on the issue has shifted to align more closely with prediction market operators’ arguments. On 29 January 2026, US CFTC chairperson Michael Selig announced the withdrawal of a 2025 “staff advisory” that specifically cautioned registrants about offering access to sports-related event contracts due to ongoing litigation, and a 2024 proposed rule that would ban political and sports-related event contracts. Those withdrawals became effective on 4 February 2026. In his 29 January remarks, chairperson Selig lauded the history of the CFTC and traced the industry development from early “bucket shops” in the late nineteenth century through the Commodity Futures Modernization Act upon the advent of electronic trading platforms. According to chairperson Selig, prediction markets are among the latest innovations making up the “foundation of modern markets”. Additionally, chairperson Selig seemingly attempted to plant the federal flag in the prediction market regulatory landscape, directing CFTC staff to “reassess the Commission’s participation in matters currently pending before the federal district and circuit courts. Where jurisdictional questions are at issue, the Commission has the expertise and responsibility to defend its exclusive jurisdiction over commodity derivatives”.

Of course, chairperson Selig’s declaration is at odds with state attorneys general, like Letitia James, who seek to regulate sports-based event contracts under state sports wagering regulatory frameworks.

Notable cases

While Attorney General James’ position is clear, the future landscape of these exchanges is anything but “predictable”. Generally, the argument against state regulation of prediction markets offering sports-based event contracts is that these platforms, including Polymarket and Kalshi, operate a “contract market” subject to the exclusive jurisdiction of the Commodity Exchange Act and CFTC. Thus, the argument goes, any state legislature’s attempt to regulate them is pre-empted by federal law.

New York is at the centre of this issue, with several notable cases pending in its federal courts.

For instance, Kalshi has taken the offensive against state regulation. In the case KalshiEX LLC v Williams (case number 1:25-cv-08846), pending in the United States District Court for the Southern District of New York, Kalshi sued the New York State Gaming Commission (NYSGC) and individuals associated with the NYSGC, seeking a permanent injunction and declaratory relief. The suit followed a cease and desist letter from the NYSGC to Kalshi dated 24 October 2025. In the lawsuit, Kalshi seeks a judgment declaring that any New York law, including Racing Law Sections 104 and 1367, along with Penal Law 225.00(2), to the extent they are used to regulate Kalshi’s prediction markets, violate the Supremacy Clause of the United States Constitution. Kalshi seeks a permanent injunction prohibiting the NYSGC from enforcing New York laws that seek to regulate Kalshi’s prediction markets.

Kalshi also filed a motion for a preliminary injunction and temporary restraining order enjoining the NYSGC from enforcing New York laws against Kalshi’s prediction markets during the pendency of the action. Notably, the parties stipulated that the NYSGC would not take any enforcement action against Kalshi pending the Court’s disposition of Kalshi’s motion for a preliminary injunction and temporary restraining order. The motion remains pending.

Indigenous tribes have also weighed in on this Kalshi case. On 8 December 2025, several indigenous tribes and gaming associations filed a brief as amici curiae in support of the position of the state Attorneys General. These amici argue that Kalshi has unlawfully entered into the gaming market, adversely impacting tribal gaming revenue and in some cases improperly infringing on tribes’ compacts with states wherein tribes are the exclusive operators of certain types of gaming within a particular state.

Another such case is a proposed class action against Blockratize, Inc (doing business as Polymarket), newly filed in the United States District Court for the Southern District of New York (case number 1:26-cv-00973). The complaint alleges that Polymarket operates as an unlicensed online sportsbook in violation of New York’s Racing Laws. In what is becoming a familiar playbook, the complaint notes that users can place bets on sports related events, including individual player metrics and events outside the sports world, like political elections. Importantly, the complaint emphasises the significant revenue sports-specific contracts generate for Polymarket, alleging that Polymarket has generated over USD6 billion in earnings on sports-related contracts. As Attorney General James echoed in her recent alert, the complaint accuses Polymarket of misleadingly promoting itself as a “prediction market” rather than what plaintiffs argue is its true function, a sportsbook. According to the complaint, Polymarket’s characterisation of its operations is designed to evade regulatory scrutiny and mislead consumers.

Another similar case is Hallman, et al. v KalshiEX LLC et al. (case number 1:26-cv-00317), pending in the United States District Court for the Southern District of New York. There, similar to the Polymarket case, plaintiffs argue that Kalshi operates a sportsbook and that it should not be permitted to circumvent state gaming laws and regulations simply by characterising itself as a contract marketplace. In the proposed class action, the Hallman plaintiffs attack one of Kalshi’s key arguments – that its prediction markets are not the functional equivalent of sportsbooks because they simply connect users on opposite sides of a given position. The Hallman plaintiffs instead allege that Kalshi actually operates as any other sportsbook “house” by taking positions on contracts through its own affiliate Kalshi Trading LLC and “other interested affiliates”. The case is newly filed and remains pending.

Bigger picture – protecting the integrity of the game

The increased focus on, and scrutiny of, prediction markets in New York is part of a larger mosaic of developments in sports wagering. These developments are the result of the obvious need for action to protect not only consumers, but the integrity of sport, in the face of the popularity and ubiquity of sports betting.

New legislation introduced

Several pieces of legislation have recently been introduced in the New York State Assembly related to sports betting and specifically targeting prediction markets. Assembly Bill A09251, known as the ORACLE Act, would generally prohibit prediction market platforms from offering any sports wagering contracts to New York residents. If enacted, the effect of such legislation remains unclear, in light of the ongoing dispute over authority to regulate and given that the New York Attorney General has already indicated an intent to use the existing Racing Laws for that purpose.

Additionally, Assembly Bill A09343 was recently introduced and takes aim at in-play and “live” sports wagers. Such live bets have become a popular feature of sportsbooks, and include wagers placed after a game has started with constantly updating odds and bets tied to individual plays. If enacted, the law would prohibit accepting in-play sports wagers.

Criminal enforcement

There is already a significant effort underway in New York to protect the integrity of sporting events through criminal enforcement actions.

For example, in two pending cases in the United States District Court for the Eastern District of New York (U.S. v Aiello, et al.; 1:25-cr-00314 and U.S. v Earnest, et al.; 1:25-cr-00323), federal prosecutors charged high-profile defendants, including National Basketball Association (NBA) player Terry Rosier, former NBA player Damon Jones and NBA coach Chauncey Billups, in cases alleging, among other things, illegal sports betting conspiracies. In the Earnest case, prosecutors specifically allege the existence of a “prop bet” rigging scheme. Prosecutors say that the defendants used non-public information like player injury updates and playing status to place winning “prop bets” – bets made regarding the occurrence or non-occurrence during a game of an event not directly affecting the game’s outcome.

Similarly, in another recent criminal enforcement case, Cleveland Guardians pitchers Emmanual Clase and Luis Ortiz face charges before US District Judge Kiyo Matsumoto in Brooklyn. The charges stem from allegations that they illegally conspired to throw specific pitches that would result in payouts for third-party bettors. That case is U.S. v Clase, et al.; 1:25-cr-00346, pending in the United States District Court for the Eastern District of New York. Trial is currently set to begin on 4 May 2026.

While not a New York case, a decision from Judge Jason D Woodbury of the First Judicial District in Nevada emphasised the concern surrounding insider manipulation in the context of prediction markets. In signing a temporary restraining order banning Polymarket from offering sport contracts in Nevada for two weeks, Judge Woodbury noted that the unregulated nature of prediction markets results in a lack of safeguards against bets being placed by owners, coaches, players or other officials who could influence the result from the inside.

In another high-profile case involving defendants with ties to New York, a federal indictment was recently unsealed in the United States District Court for the Eastern District of Pennsylvania. The indictment describes an alleged point shaving scheme involving more than 39 players on 17 National Collegiate Athletic Association (NCAA) Division I teams. There, 20 of the 26 defendants played college basketball during the 2023–24 and 2024–25 seasons. The scheme alleged in the indictment involves “fixers” who recruited players to participate in a scheme, offering bribes of anywhere from USD10,000 to USD30,000 to intentionally underperform. These bettors would then place bets on the fixed games, the indictment alleges.

Player and other official involvement in gambling schemes is a real and prevalent issue. The concern is amplified where the result of a particular prop wager is easier to manipulate than the outcome of a game as a whole. Officials argue that the concern is even more amplified if the “wager” is placed through an unregulated prediction market. The ease of manipulation is a key issue influencing enforcement policy decisions in New York and elsewhere.

The issue has already captured the attention of the United States Attorney for the Southern District of New York, Jay Clayton. At a recent event, Mr Clayton stated publicly that he anticipates prosecutions in the prediction market arena, even offering the example of fixing a game of golf.

Given the flurry of civil cases, criminal charges and proposed legislation, this area is likely to continue to develop throughout 2026 and beyond.

NIL implications

These legal issues surrounding sportsbooks and prediction markets arise against the backdrop of historic developments in college athlete compensation, including through name, image and likeness (NIL) deals. The year 2025 saw two major developments in the NIL industry in the form of settlement of litigation involving the NCAA, both with implications for New York efforts to curtail the potentially negative impacts of sports wagering and sports-based event contracts.

First, in March 2025, a group of several Attorneys General, including New York Attorney General Letitia James, procured a settlement with the NCAA protecting student athletes’ right to learn about potential NIL compensation opportunities during the college recruitment process – ie, before deciding whether to enrol or transfer to a university. There, plaintiffs alleged that the NCAA’s “NIL recruiting ban” unreasonably restrained competition, in violation of Section 1 of the Sherman Act, for student athletes among schools and suppressed NIL compensation opportunities for prospective Division I college athletes and current student athletes in the transfer portal. As part of the settlement, the NCAA was permanently restrained from, among other things, enforcing its by-laws constituting the NIL recruiting ban.

Another development in this sphere came later in 2025 through the resolution of the college athlete NIL litigation case in the United States District Court for the Northern District of California. There, the NCAA agreed to a USD2.78 billion settlement that would compensate athletes denied the opportunity to earn NIL revenue in the past but also establish a revenue sharing system to compensate those athletes for the ensuing ten years. Judge Claudia Wilken granted final approval of the class-action settlement agreement on 6 June 2025.

The NIL recruiting ban settlement and NIL revenue litigation settlement demonstrate a shift in the college athlete compensation paradigm, including through the lens of the NCAA. One side effect of this paradigm shift could be that student-athletes may become less susceptible to the influence of “fixers” trying to recruit them into betting schemes, like the one alleged in the sweeping indictment pending in the Eastern District of Pennsylvania.

All of these recent trends and developments in New York Sports Law focus on and grapple with protecting the integrity of the game while allowing space for gambling, which has clearly become an integral part of the fan experience. Consumer demand for that experience, along with technological developments, will continue to foster innovation from all parties on all sides of these issues. New York courtrooms are sure to remain a fixture of that innovation moving forward.