Event Contracts Versus Sportsbooks: Charting the Legal Divide in U.S. Gambling Law

By Caitlin Vanderkarr and Eric L. Kintner

Peer‑to‑peer sports event contracts have surged in popularity. Kalshi, a U.S.-based prediction market, reported that its sports event contracts yielded $249 million through the first two rounds of the NCAA Basketball Tournament.¹ Sports event contracts have now collided head‑on with Federal statutes drafted long before online markets, a patchwork of state gaming laws, and regulators still wrestling with the definition of “wagering.” The result? A brewing storm of legal uncertainty, market disruption, and existential questions arising from the tension between operator and peer-to-peer control of the odds when staking value on sports.

Some believe that the Trump administration appears to have shifted its perspective to be more friendly to prediction markets.² Under Federal law, the Commodity Futures Trading Commission (CFTC) regulates derivatives markets in the United States³ pursuant to the Commodity Exchange Act (CEA), as amended, and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).⁴ The CFTC recently announced a stakeholder roundtable to chart the future of sports event contracts,⁵ then abruptly cancelled the roundtable, purportedly to change the format to a hearing with “a broad array of stakeholder viewpoints,”⁶ while Kalshi’s earlier Federal district‐court victory allowing political event contracts is currently on appeal before the Federal D.C. Circuit Court of Appeals.⁷ The first CFTC roundtable was scheduled for April 25, 2025,⁸ with various attendees, potentially including the American Gaming Association (AGA),⁹ which wanted to discuss concerns such as that “these sports events contracts are problematic.”¹⁰ The CFTC received comments in the months leading up to the roundtable from the AGA, GeoComply, the Arizona Indian Gaming Association, the MLB, the National Council on Problem Gambling, various tribes and associations, regulators, and individuals.¹¹ However, the CFTC has not provided a scheduling update.¹²

Despite CFTC jurisdiction, Federal criminal statutes may apply if sports event contracts are found to constitute wagering. Notably, the Interstate Wire Act of 1961 could prohibit sports event‐contract trades across state lines, since such transactions “assist in the placing of wagers” between parties in different jurisdictions.¹³ Additionally, the Illegal Gambling Business Act may be invoked to target operators that are unlicensed or operating illegally in a state if the operation involves risking value on event outcomes, though its applicability has not been directly tested.¹⁴ Similarly, the Unlawful Internet Gambling Enforcement Act (UIGEA) prohibits gambling activities transmitting money for “unlawful internet gambling debts” to someone “engaged in the business of betting,” however the underlying wagering activity must be illegal in the jurisdiction seeking to invoke UIGEA.¹⁵ If gambling is conducted on the land of a tribe by anyone other than the tribe, then the Indian Gaming Regulatory Act could also be implicated, involving yet another sovereign entity’s authority.¹⁶ Subsequent to the repeal of the Professional and Amateur Sports Protection Act of 1992, states were vested with the authority to legislate and regulate their own sports betting frameworks, which is why sportsbooks operate under individual state gaming laws, with licensing, consumer‐protection, and tax frameworks varying widely from state to state.¹⁷

Several providers have been testing the derivatives market for sports event contract viability. Galactic, a company based in the United Kingdom, provides a platform for contract trading on “outcomes of trends and themes around major global sporting events,” but stops short of offering contracts on the outcomes of sporting events themselves.¹⁸ Kalshi operates in all fifty states under CFTC regulation and recently began offering Major League Baseball event derivatives.¹⁹ DraftKings, a sports betting platform licensed in twenty-six states,²⁰ created a subsidiary and applied for membership in the National Futures Association (NFA)²¹ — a requirement in many cases by the CFTC — and appeared to be moving toward prediction markets prior to withdrawing its NFA application in March of 2025, just days after Kalshi began offering Major League Baseball event derivatives.²²

As tensions mount between state-regulated sports books and federally regulated sports contract prediction markets, Kalshi appears to be a bellwether. Kalshi offers event contracts related to “yes-or-no question[s]” on various topics, including, but not limited to, “economics, culture, weather, scientific advancements… commodities, forex, [and] S&P,” which may fall within CFTC regulatory authority in the derivatives market.²³ According to Kalshi’s website, event contract prices are based on “the market’s assessment of the probability that an event will happen,” and Kalshi prides itself on the accuracy of its forecasts.²⁴ Kalshi defines an event contract as “a new type of asset class that gives investors the ability to make trades on their opinions.”²⁵ Each market question is structured so that there is a “YES” contract and a “NO” contract, each of which can be purchased by an investor based on opinion.²⁶ In essence, Kalshi matches a “YES” user and a “NO” user on the same question; each pays an amount determined by market pricing (for example, a YES might cost $0.60 and its reciprocal NO might cost $0.40).²⁷ The user whose prediction is correct recovers their cost and the cost of the reciprocal contract (the YES user above could recover their $0.60 and take the NO user’s $0.40 as profit), although the prices fluctuate based on trades.²⁸

In 2024, Kalshi prevailed in Federal district court, succeeding in overturning the CFTC’s order (still in appeal).²⁹ With that win, Kalshi exercised its right to offer contracts on election outcomes within the futures market.³⁰ Kalshi operates sports event contracts in all U.S. states, several of which have not legalized sports betting.³¹ However, as Kalshi operates within the derivatives market and operates many types of contracts — including “product launches” and “stock market performance” — Tarek Mansour, Kalshi’s CEO, does not believe Kalshi should be subjected to the same standards and regulations as sportsbooks, because, in his view, calling event contracts gambling would be tantamount to “calling the entire financial market gambling.”³²

Crucially, many sports betting providers in the legally-regulated market allow users to bet against them — a model known as “betting against the house” — a model Kalshi does not use.³³ Instead, Kalshi acts as a type of intermediary between two individuals or entities who wish to take opposing positions on the same future outcome, in the form of binary event contracts.³⁴ There is some question as to whether event contracts are siphoning wagers from traditional sportsbooks in states with legalized and regulated sports betting, due to Kalshi’s offering of potentially more favorable pricing on sporting events, which could increase friction between state and federal regulators.³⁵ However, Mansour emphasized that Kalshi allows trades among individuals, while sportsbooks involve bets against the house; in particular, sportsbooks “set[] the odds and [] make money if you’re losing money.”³⁶

Nevertheless, individual states have recently taken action against Kalshi for alleged violations of state laws related to gambling; for example, Nevada — one of the best known gambling locales in the country — sent Kalshi cease-and-desist letters earlier this year regarding its offering of event contracts.³⁷ Kalshi’s most recent legal battle with New Jersey, resulting from a cease-and-desist letter, hinges on interpretations of preemption and exclusive jurisdiction, although the District Court Judge has so far granted Kalshi a preliminary injunction allowing it to continue to operate in New Jersey.³⁸ It appears that the initial Federal courts that have reviewed these letters have concerns with states’ legal interpretation of their authority, with the Court stating in the Nevada case “federal law allows Kalshi to offer both sports and election-based event contracts on its exchange.”³⁹ Some believe the executive branch may also be indicating its comfort with Kalshi, as Kalshi welcomed Donald Trump Jr. as an advisor and President Trump subsequently “nominated Kalshi board member Brian Quintenz as permanent chair of the CFTC.”⁴⁰ As of the date of this legal alert, a total of six states – Nevada, New Jersey, Illinois, Maryland, Ohio, and Montana – have sent cease-and-desist letters to Kalshi⁴¹ asserting that Kalshi’s sports event contracts violate their state laws, while Connecticut, Michigan, Massachusetts,⁴² Washington, and Kansas have begun investigating whether Kalshi’s offerings violate state sports betting laws.⁴³

Another event contract market provider, Polymarket, is facing its own legal questions, but manages to charge no fees and “still do[] hundreds of millions of dollars in volume each month” on its cryptocurrency-powered platform.⁴⁴ Some believe the current administration appears poised to reduce cryptocurrency regulation, which may become a positive factor in the continued operations of prediction markets that accept cryptocurrency.⁴⁵

We may soon find out whether or not crypto is the great differentiator, as states appear posed to focus on crypto gambling next. Arizona provides an example as to how this may occur. The state of Arizona, through its regulatory body – the Arizona Department of Gaming (ADG) – “issued multiple cease-and-desist orders against unlicensed and unregulated gambling operators” who were “allegedly providing access to illegal online gaming” in Arizona through online “slot-style casino games, sweepstakes, sports wagering, horse race betting and peer-to-peer wagering.”⁴⁶ The state contends that there is financial risk and insufficient consumer protection over unregulated entities in the online gaming space, stating that “[i]llegal gaming-no matter the platform or format-has no place in Arizona,” whether through “sweepstakes, online casino-style games, or unauthorized sports betting.”⁴⁷ Notably, however, a search on cryptocurrency-based online “casinos” in Arizona revealed that several of the “Best Crypto Casinos in Arizona” were not among the entities listed as recipients of these letters.⁴⁸ This may change, as Arizona legislators have introduced bills (SB1373 and SB1025) to incorporate cryptocurrencies into governmental functions, including stablecoins and other digital assets.⁴⁹ However, this remains to be seen as Arizona Governor Katie Hobbs appears poised to veto the bill, reportedly for reasons “unrelated to its merits”.⁵⁰ Even more indicative that Arizona may take action against online cryptocurrency-based gambling activities, HB2325 is working its way through the Arizona legislature; if enacted, the bill would expand asset forfeiture to include digital assets, such as cryptocurrency, in cases of criminal conviction.⁵¹ Arizona law criminalizes certain gambling activities that do not fall within a statutory exception, so it stands to reason if HB2325 passes and is not vetoed by Governor Hobbs, the ADG may next plan to take enforcement action against cryptocurrency-based online casinos in order to seize those digital assets.

As money surges into sports event prediction markets, state gaming regulators likely will not remain passive observers. These initial strikes in Nevada and Arizona may portend a fiercer game of regulatory one‑upmanship as states seek to increase their jurisdiction over the lucrative wagering industry, rewrite rules, issue guidance and interpretations, and even lobby for new statutes that may seek to bring sports event prediction markets under state gaming regulations. The next chapter in sports wagering is less likely to be written in D.C., and much more likely scribbled hastily in the statehouses scrambling to enhance their slice of the betting pie.

*Any opinions expressed are the authors’ and not necessarily those of the firm or their colleagues.