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The CFTC has a problem. It’s trying to regulate prediction markets without a clear legal definition of the word “gaming,” and the industry is already moving faster than the rulebook.
On August 20, CFTC Chairman Michael S. Selig spoke before the Innovation Advisory Committee and basically admitted the agency is working with broken tools. The terms “gaming” and “involve” — both central to how the commission decides whether an event contract is legal — have no statutory definitions. That gap isn’t just a bureaucratic headache. It means exchanges can submit contracts that get rejected for reasons that aren’t written down anywhere, and operators can’t plan around rules that don’t fully exist yet. Selig’s comments came as the CFTC is pushing forward on proposed amendments to Parts 38 and 40 of its rules, including a rewrite of Rule 40.11, which targets contracts tied to gaming or other activities deemed unlawful under federal or state law. The proposed rulemaking has already pulled in more than 1,500 public comments — a volume that pretty much tells you how much is at stake.
ProphetX, Kalshi, and the Federal Designation Problem
ProphetX CEO Dean Sisun has been vocal about what he sees as the core distinction: federally designated exchanges are not sportsbooks. ProphetX LLC got its designated contract market listing on June 11, 2026, and Sisun’s argument is straightforward — on a two-sided, peer-to-peer exchange, the operator doesn’t take the other side of your bet. Participants trade against each other. The venue stays neutral. That’s fundamentally different from a traditional sportsbook model, where the house books every wager and carries the risk. Sisun wants that distinction preserved, and he’s pushing for what he calls competitive price formation and venue neutrality as the defining features of legitimate exchange-based event contracts.
But federal designation alone doesn’t settle much, it turns out. Nevada moved to bar Kalshi from serving its residents, accusing the platform of conducting unauthorized trading from within the state. The court upheld that decision. So a company can be federally recognized as a legitimate contract market and still get blocked at the state level. New Jersey’s attorney general has gone further, asking the U.S. Supreme Court to weigh in on whether state sports-gambling laws can apply to prediction markets at all. That case could reshape the entire landscape — or it could drag on for years while operators try to figure out which rules actually govern them.
The Ninth Circuit’s ruling against Kalshi is probably the clearest example of how messy the federal-versus-state question has gotten. Federal financial regulation and state gambling law are colliding over the same products, and right now there’s no clean answer about which one wins.
DraftKings, Novig, and the Blurring Lines
Here’s where it gets complicated. The line between sportsbook and exchange is blurring fast — and some companies seem fine with that.
Novig operates sportsbook-style products on a federally designated exchange. In its first week after launch, it hit $125 million in trading volume. That number is hard to ignore. It’s the kind of result that tells you demand exists, that users aren’t particularly bothered by the structural distinctions regulators care about, and that the commercial opportunity here is real. Whether Novig’s model survives regulatory scrutiny is a separate question. But $125 million in week one is a statement.
DraftKings is going a different direction. It’s seeking CFTC approval for its event-contract templates, which looks like a deliberate strategy to route around state-by-state licensing requirements. Getting federal sign-off on a template could mean operating nationally without fighting 50 separate regulatory battles. Smart play, if it works. Unclear yet whether the CFTC’s proposed rules will make that path easier or harder.
The proposed amendments are supposed to define what separates a legitimate financial product from a gambling activity. Public-interest factors would be part of the test — the idea being that contracts serving a genuine economic purpose should be treated differently from contracts that are basically just dressed-up sports bets. How exactly those factors get defined is still being worked out. That’s the whole problem.
Brokers and exchanges are already doing their own homework. Before touching event contracts, they’re looking hard at price formation mechanics, counterparty exposure, and whether a venue is truly neutral or quietly functioning like a book. Because right now, the regulatory framework doesn’t give them much else to go on.
The 1,500-plus comments on the proposed rulemaking split pretty clearly between two camps: people who see prediction markets as legitimate derivatives infrastructure, and people who think they’re gambling with better branding. The CFTC has to write rules that somehow account for both views — and for products like Novig’s, which seem to deliberately straddle the line.
Amendments to Parts 38 and 40 are meant to modernize listing rules and add retail protections. The Rule 40.11 rewrite is the piece everyone’s watching most closely. It’s where the agency will have to actually commit to definitions rather than leaving terms like “gaming” open to interpretation.
Novig posted $125 million in its first week. DraftKings is knocking on the CFTC’s door. And Nevada already told Kalshi no.
Frequently Asked Questions
What is the CFTC’s problem with the term “gaming” in prediction market rules?
The terms “gaming” and “involve” lack statutory definitions, which means the CFTC can reject event contracts without clear written standards — a gap Chairman Michael S. Selig acknowledged publicly on August 20.
What happened to Kalshi in Nevada?
Nevada barred Kalshi from serving its residents, accusing it of unauthorized trading from within the state, and the court upheld that decision — showing that federal designation as a contract market doesn’t override state gambling laws.
Why It Matters
The CFTC's struggle to define "gaming" highlights a critical regulatory gap that could hinder the growth and legitimacy of prediction markets, an emerging segment in the broader crypto landscape. As companies like Novig demonstrate substantial market activity and revenue potential, the absence of clear regulatory guidelines may lead to increased uncertainty for investors and innovators, potentially stifling competition and innovation in a rapidly evolving market. This situation emphasizes the need for regulatory bodies to adapt to the fast-paced developments in digital finance to ensure both consumer protection and industry growth.
