CME and Kalshi Clash Over Whether U.S. Prediction Markets Are Finance or Gambling

August 22, 2026

Daily Feed

#CFTC #Prediction Markets #Kalshi #CME Group

CME and Kalshi Clash Over Whether U.S. Prediction Markets Are Finance or Gambling

CME Group and Kalshi turned a CFTC roundtable into a very public fight over who gets to define prediction markets in the U.S.

Incumbent vs. upstart, CME defended regulated markets; Kalshi pushed back hard.
Federal vs. state power, The real fight is over whether event contracts are derivatives or gambling.
Law first, hype second, New York, Washington state, and the CFTC are all pushing the issue in court and through enforcement.
Consumer risk is the ugly part, A survey cited in the reporting found heavy losses and a lot of borrowed money.

The clash between CME chairman Terry Duffy and Kalshi co-founder Luana Lopes Lara was not just a bruising exchange of egos. It exposed the core issue hanging over prediction markets: are these federally regulated financial instruments, or gambling products that belong under state law?

That distinction is everything. If prediction markets are treated like derivatives, firms can argue for national reach under CFTC oversight. If they are treated like gambling, they can get trapped in a nasty state-by-state licensing mess, the kind of regulatory swamp that kills startups and keeps incumbents comfy.

At a CFTC roundtable in Washington, D.C., Duffy attacked prediction market operators as “carnival barkers” and mocked Kalshi’s business model. Lara fired back, challenging CME’s record and telling Duffy, “Maybe you should learn a bit about efficiency then.” Duffy answered: “Well, maybe you should learn about credible markets.”

Blunt? Absolutely. Useful? Also yes. Because beneath the theater is a serious policy fight.

CME is the world’s largest futures exchange. Kalshi is the scrappier newcomer trying to make event trading feel like a normal market instead of a sportsbook with a nicer interface. Duffy’s basic message was that CME runs serious markets and Kalshi is playing dress-up. Kalshi’s message is that prediction markets are a legitimate way to trade information and should not be shoved into the gambling bucket just because the outcome might be a hot dog contest, an election, or a football game.

What prediction markets actually are

A prediction market lets users buy contracts tied to an event. If the event happens, the contract pays out; if it doesn’t, it expires worthless. That is why these products sit in such a legal gray zone. They can look like speculative betting, but they can also function as a way to aggregate information and express expectations about the future.

That “price discovery” angle matters. Price discovery is the process by which a market collects information from participants and turns it into a price that reflects what they think is likely to happen. In theory, that can be useful. In practice, if a contract is mostly attracting retail punters hunting for a quick score, the noble economics pitch starts to sound a bit like a compliance department trying to cosplay as a philosophy seminar.

Kalshi holds registration as a designated contract market, or DCM, with the CFTC. That means it is recognized as a regulated trading venue under federal derivatives rules. But registration is not a magic shield. States still see plenty of room to argue that some event contracts are really gambling products wearing a financial costume.

The legal fight is already ugly

The pressure on Kalshi is not theoretical. New York has sued the company for more than $36 billion in damages, according to the CFTC’s August 11, 2026 statement. The same statement said New York Attorney General Letitia James filed the complaint in state court, prompting KalshiEX to notify the CFTC of a market emergency.

The CFTC responded by invoking emergency authority and ordering KalshiEX to continue operating under the Commodity Exchange Act’s Core Principles. That matters because it shows the agency is not just talking tough. It is actively stepping in to keep Kalshi trading while the legal fight plays out.

The CFTC’s position is straightforward: prediction markets are derivatives, not state gambling products, and Congress did not intend for interstate financial markets to be chopped up by a patchwork of gaming laws. The agency’s chair, Michael S. Selig, has been blunt about that view.

“We will see you in court.”

That line was not subtle, and it wasn’t meant to be.

States disagree. Their argument is that event contracts on sports, elections, politics, and other sensitive outcomes are too close to betting to be treated like traditional derivatives. They want those markets subject to state gambling rules, not federal preemption.

That split is why the jurisdiction fight has become so messy. Federal derivatives law and state gambling law are built on different assumptions. One is designed for financial markets. The other is designed to police betting. Prediction markets are forcing those two systems to collide head-on.

Why the roundtable mattered

The Duffy-Lara exchange cut through the legal jargon and made the commercial stakes obvious. CME is not some neutral referee here. It is the incumbent giant, and it has every reason to care how event contracts are defined, regulated, and monetized.

At the same time, Kalshi has every reason to resist being boxed into the gambling category. If it loses the federal preemption argument, the company could be forced into a state-by-state compliance grind that would be expensive, slow, and probably devastating for growth.

That is the real business issue hiding under all the regulatory language. One path leads to a national market. The other leads to a maze.

CME has also argued that the CFTC’s proposed “gaming” definition goes too far. According to CNBC’s July 28 report, CME general counsel Jonathan Marcus said the proposal amounts to a “striking overreach” into state sports regulation. The same report noted that CME also works with FanDuel as its CFTC-regulated exchange for sports prediction markets.

That last part deserves a little honesty. CME is not just defending principle; it is also defending position. The exchange wants the rules written in a way that protects its own lane. Everyone in this business loves regulation when it happens to hurt the other guy.

Why regulators are getting tougher

The CFTC’s June 2026 proposal targeted some of the most controversial event contracts, including war-related contracts, assassination contracts, and some sports proposition bets. Nine Democratic senators also urged the agency to prohibit wildfire event contracts.

That should tell you something: the debate is no longer limited to whether prediction markets are clever information tools. Regulators are increasingly worried about whether some of these contracts cross into socially toxic territory.

The category is not one-size-fits-all. A contract tied to a Bitcoin price level is not the same as a contract tied to a political assassination or a natural disaster. Regulators are trying to draw lines contract by contract, because sweeping rules would either crush legitimate use cases or leave the ugliest stuff untouched.

That nuance matters. The strongest case for prediction markets is that they can help people hedge uncertainty and surface information faster than stale polls or broken punditry. The weakest case is that some products are just gambling with a derivative label slapped on top so lawyers can sleep at night.

The consumer problem regulators should not ignore

A survey published August 12 and cited in the reporting found that 79% of prediction market users lost money in the past year and 51% used borrowed funds. Those are serious numbers, even if survey methodology always deserves a skeptical eye.

Still, the direction of the signal is hard to miss. If most users are losing and a lot of them are borrowing to play, then prediction markets are not merely elegant information tools. They can also become another retail loss machine with better branding than a casino floor.

That is the part regulators should care about, not just who gets the jurisdictional trophy. If these platforms are turning into high-frequency self-own machines for retail users, the consumer-protection argument gets a lot stronger very quickly.

The reporting also compared that 79% loss rate with historical retail futures trading loss rates of around 70% to 75%, and with U.S. retail forex loss rates of about 80%. That does not prove prediction markets are uniquely predatory. It does suggest retail behavior in speculative markets tends to rhyme, no matter how shiny the app looks.

Prediction markets are growing fast enough to matter

Polymarket, the blockchain-based prediction market running on Polygon, showed what this category can become when liquidity shows up. It reportedly peaked during the 2024 U.S. presidential election with about $3.5 billion in total volume. That is not pocket change, and it helps explain why regulators, exchanges, and gaming companies are all suddenly interested.

The source also says prediction market volume roughly tripled between 2024 and 2025 and is on pace to triple again in 2026. Those figures should be treated carefully unless they are tied to a named methodology, but the broader direction is clear: the market is growing fast.

Fast growth tends to attract two species of attention: customers and regulators. Sometimes both at once. Usually not for the same reasons.

That growth also helps explain why the CFTC is drawing a harder line now. Once a niche product starts scaling into a real market, it stops looking like an experiment and starts looking like a policy problem.

What comes next

The CLARITY Act does not directly address prediction markets, so Congress has not yet settled the question in plain language. That leaves the courts, the CFTC, and the states to keep slugging it out.

CFTC Issues Proposed Rule Regarding Prediction Markets, but that still does not fully settle the issue. New York’s lawsuit, the Washington state ruling against Kalshi, and the CFTC’s emergency action all point in the same direction: this is moving toward a full jurisdictional showdown. The end result could decide whether prediction markets become a serious, federally recognized part of U.S. finance or get squeezed into a narrower, more heavily restricted corner of the economy.

There is a real argument for prediction markets. They can be useful, fast, and brutally honest in a way most of finance and media are not. They fit the broader case for freer markets, more decentralized price discovery, and less gatekeeping from the old institutions that have spent decades pretending to be smarter than everyone else.

But there is also a real dark side. Retail users losing money, borrowed-funds speculation, state gambling concerns, and contract types that feel grotesque rather than informative, all of that is already here. If the industry wants credibility, it will have to earn it the hard way, by surviving scrutiny without hiding behind buzzwords, legal contortions, or “innovation” theater.

For now, CME vs. Kalshi is bigger than a corporate squabble. It is a fight over whether prediction markets in America will be treated as legitimate financial tools, regulated gambling, or an awkward hybrid that makes everybody mad until a court finally draws the line.

Key questions and takeaways

Are prediction markets derivatives or gambling?
That is the central fight. The CFTC says they belong under federal derivatives law, while states argue many of them function like betting products and should fall under gambling rules.
Why does Kalshi matter so much?
Kalshi is a major test case for whether a prediction market can operate nationally without being crushed by state-by-state enforcement.
Why is CME in this fight?
CME has a direct commercial interest in how event contracts are defined and regulated. This is about legal principle, yes, but also about protecting market share and positioning for the future.
Why are regulators stepping in harder now?
The market is growing fast, the legal conflicts are spreading, and some contract types raise obvious public-policy concerns. That combination tends to wake regulators up in a hurry.
Can states shut Kalshi down?
They may be able to block or restrict products within their borders, but federal preemption claims and ongoing litigation make a full shutdown uncertain. This is likely to be decided in court, not by press release.
What is the biggest risk for users?
The biggest risk is assuming a prediction market is a smarter bet just because it looks like finance. The reported loss data and borrowed-funds use suggest retail traders can get burned fast, especially when liquidity is thin and leverage creeps in.