On March 23, 2026, a bipartisan proposal emerged within the United States Congress, aimed specifically at prediction contract trading in sports and entertainment, seeking to establish a "prohibition line" at the federal level. The targeted entities are not traditional offline gambling companies but platforms like Polymarket, Kalshi that are already or partially within the CFTC regulatory purview of prediction markets, operating in a gray area between derivatives and gambling under the guise of "event contracts" and "forecasting tools." This time, federal regulatory agencies, state gambling sovereignty, and the tax interests behind them are all brought to the open battlefield of prediction markets.

Washington's Raid on Prediction Markets: Sports and Entertainment as Primary Targets

This proposal is not a blanket denial of all prediction markets but rather specifically targets event contracts related to sports and entertainment. In other words, predictions regarding macroeconomics, election results, or financial indicators are not yet included in the direct banning scope; the first to be "liquidated" are sports betting and entertainment event contracts, which are closest to traditional gambling forms and most likely to provoke mass participation and regulatory sensitivity.

According to reports from The Wall Street Journal and dual sources from crypto media, one core statement of the proposal is to "plug federal regulatory loopholes to prevent prediction markets from expanding into the sports betting realm." Legislators believe that the current CFTC oversight of such platforms is closer to a testing ground for derivatives, lacking clear boundaries for sports betting, giving platforms room to extend into sports and entertainment. In this context, criticisms that "the CFTC is greenlighting and promoting the expansion of prediction markets" are frequently cited.

More sensitive is the fact that this is a bipartisan proposal. In a highly polarized Washington, issues around technology and financial innovation often lead to party divisions, but on the matter of "plugging loopholes and preventing expansion," both sides rarely align together. This consensus is driven by the dissatisfaction with the CFTC's recent permissiveness towards certain prediction contracts, making sports and entertainment contracts a focal point: they can be portrayed as symbols of "gambling spillover" and are easily linked to narratives of "regulatory failure."

CFTC Greenlights and State Gambling Discrepancies

To understand this backlash, one must return to the historical trajectory of prediction markets. For years, event contracts have remained in a legal gray area: they neither have a direct counterparty relationship like traditional futures with commodities or interest rates, nor do they share a high degree of similarity with legally sanctioned forms of gambling across various states. Regulators have repeatedly wavered between narratives of technological innovation and public protection pressure, while platforms gradually test boundaries under the guise of "research tools" and "information markets."

A true turning point occurred in 2024, when the CFTC approved some political event contracts on Kalshi, marking the first recognition of prediction markets at the federal level under a relatively "compliant experimental" posture. This move was seen by many industry participants as a "green light" and interpreted by some legislators as the CFTC actively expanding the regulatory experimental territory, incorporating betting behaviors that should be controlled at the state level into the federal derivatives framework.

In stark contrast is the sports betting compliance system that has been operating in various states for many years: licensing, operational boundaries, compliance reviews, and tax arrangements are all led by state governments, and in some regions, additional independent agreements with tribal casinos are layered. Sports betting is meticulously dissected within the framework of state law, while CFTC's oversight of prediction markets resembles more of a "design space with extensive potential" institutional experiment.

This discrepancy has sparked the most direct concern among legislators: once the federal level recognizes that bets on sports events can be made through prediction contracts, prediction platforms could potentially "de facto become sports betting" — closely resembling sports betting in user experience but legally classified under federal derivatives regulation, thus circumventing state gambling licensing and compliance constraints. The current proposal explicitly includes a ban on sports prediction contracts as part of its targeted scope, signaling correction of the CFTC's "overstepping" and warning other platforms not to engage in regulatory arbitrage along sports paths.

Tax Anxiety: Who Will Share the Sports Betting Revenue

In this game, tax is the variable that is most reluctant to be openly discussed yet is the most central. So far, 38 out of the 50 states in the U.S. have legalized sports betting, with the vast majority operating under strict state-level regulatory frameworks; state governments, local finances, and tribal casinos are highly reliant on the resulting gambling tax revenues and associated fees. Every flow of funds in sports betting is almost meticulously accounted for in budget projections and debt planning.

In media and industry commentary, phrases like "the bill will prevent platforms from circumventing public tax contributions" are frequently cited. On the surface, it appears to "maintain public finance," but domestically and internationally, platforms clearly understand the concern: the tax base may be gradually eroded by prediction markets. If sports outcomes can be bet on through prediction platforms viewed as "derivatives markets," and these platforms are not incorporated into the tax system as gambling entities at the state level, then sports betting revenues, which should be paid according to state tax rates, could be repriced or even completely detached from existing tax systems.

If sports and entertainment event betting can take shape on prediction platforms in large scale, funds may migrate from traditional online and offline gambling channels that are tightly constrained by taxes to platforms with lighter tax burdens and unclear regulatory standards. Even if this migration does not显著 manifest in the short term, it could shake states' expectations of future gambling tax revenues — expectations that are precisely the key basis for fiscal decisions and infrastructure investments. For states and localities that heavily rely on gambling taxes, the expansion of sports prediction markets poses not only a "regulatory gray area" but also a visible threat of tax revenue outflow.

Federal and State Sovereignty Tug-of-War: Redrawing Regulatory Boundaries

From an institutional framework perspective, the U.S. has long formed a relatively clear division of powers: at the federal level, the CFTC regulates derivatives and futures, focusing on systemic risks in financial markets and interstate capital flows; while states hold sovereignty over gambling licenses and taxation, determining which bets are legal, how they are taxed, and who operates them. Tribal casinos have gained a unique position within this framework through special agreements, creating complex revenue sharing and regulatory coordination mechanisms with state governments.

The rise of prediction markets pushes the boundaries of power between these two levels directly to the foreground. If the CFTC incorporates more "contracts linked to real-world events" into the experimental category of derivatives, it will factually encroach upon the regulatory domain of states concerning gambling operations, reshuffling the legal identity of betting behaviors. The proposal to ban sports prediction contracts is seen by many observers as a tightening and counteraction against this "overstepping urgency": explicitly excluding sports-related event contracts from the list of regulatory experiments through clear legislation, removing betting forms that should belong to state-level licensing and taxation from the federal derivatives narrative.

In this context, the potential stance of tribal gambling entities and certain state regulators can be discerned: they have a strong incentive to support limiting prediction markets to maintain control over local gambling businesses and taxation. For them, the issue is not whether event contracts are "innovative," but rather who manages and taxes this revenue chain. If sports and entertainment prediction markets can operate across state lines based on federal regulatory licenses without being bound by state taxes and local redistributions, then the existing licensing system and revenue-sharing patterns would be shaken.

Polymarket and Kalshi's Traffic Dilemma

Specifically addressing the platform level, prediction markets represented by Polymarket and Kalshi have been attracting users and liquidity through diversified event contracts under the CFTC's oversight or attention in recent years. Macroeconomic data, election results, financial indicators, technological progress, along with sports competitions and entertainment events like award ceremonies, collectively form their "traffic shelf." For many new users, sports and entertainment contracts serve as a natural entry point into prediction markets, with low barriers and high topicality, making them easy to spread on social media.

If sports and entertainment contracts are explicitly banned by legislation, these platforms will face direct impacts on user growth and trading volume. Some high-frequency participants may leave immediately, and the transaction peaks that could have been amplified during sports events will disappear, forcing platforms that rely on "blockbuster event contracts" to draw new users to retract their strategies. For platforms that categorize themselves as information markets, they will have to readjust their product structures in the short term, shifting focus toward macroeconomic, financial, and political events, trying to maintain liquidity and regulatory legitimacy with more "serious" contracts.

Potential response paths can be roughly categorized into three types: the first is aligning with regulations upwards, completely retreating from the sports and entertainment domains, framing their business narrative as "policy and economic forecasting infrastructure"; the second is attempting to establish synergy with state licensing systems, such as exploring cooperation with operators already holding sports betting licenses to embed prediction technology into state compliance frameworks, though this implies accepting higher compliance costs and localized regulation; the third is a riskier route — pushing the focus further towards on-chain and offshore, downplaying compliance ties with U.S. users, but under the current regulatory understanding, the space and risks of the latter are extremely challenging to measure.

The Next Act Moving from Gray Testing Grounds to Clear Battlefields

Looking at the long term, this proposal to ban sports prediction contracts is pushing the prediction market from "technological experiments in legal gray areas" toward the central stage of open federal and state competition. In recent years, event contracts have often been packaged as tools for improving informational efficiency and enhancing price discovery, with regulatory controversies more focused on details; however, as sports and entertainment contracts are specifically named, the focus of contention shifts to who has the authority to define the legality of bets and who has the right to collect these taxes.

If the ban is ultimately passed, prediction markets within the U.S. are likely to shrink to a "pure forecasting tool" role: primarily based on macroeconomic, financial, policy, and scientific events, trying to distance themselves from intuitive associations with gambling to exchange for a limited yet relatively stable survival space under federal regulation. This will weaken their penetration into popular culture but might enhance their tool attributes in professional institutions and research scenarios.

Conversely, if the ban encounters strong resistance or is even shelved during the legislative process, this controversy is likely to trigger a new discussion for a unified federal framework: how to delineate clear boundaries for prediction markets while respecting state gambling sovereignty and tax interests; which events can be classified as "legal derivatives" and which must be categorized under state gambling or banned outright. That would represent a broader institutional restructuring, rather than merely correcting at a single bill level.

For the broader crypto and on-chain prediction markets, this controversy presents significant spillover effects. Whether concerning on-chain event contracts or decentralized prediction protocols, the next few years will hinge on three main conflicting lines: how regulatory standards define the boundaries of "betting" and "forecasting," how tax attributions will be divided in interstate and international contexts, and whether the space for innovation can expand without being completely "gamified." The U.S. struggle over sports prediction contracts is just the prologue.

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