Scenario
This Thought Experiment is a scenario-based exercise designed to provoke discussion. It is not a prediction or statement of fact.
What if, within the next three to five years, the United States ends up with two parallel systems for betting on sport, one licensed and taxed state by state, the other federally regulated and effectively unlicensed at the state level, and the second system wins?
Picture 2029. The Supreme Court has declined to disturb the Third Circuit’s finding in KalshiEX LLC v Flaherty that sports-related event contracts are swaps under the Commodity Exchange Act, meaning the Commodity Futures Trading Commission holds exclusive jurisdiction over them. Congress, unable to agree on a bill that would close the gap, has let the ruling stand as de facto policy. Federally registered exchanges now list contracts on the Super Bowl, the World Series and the Premier League title race alongside contracts on interest rates and unemployment, cleared through the same infrastructure as agricultural futures. A resident of Texas or Utah, where sports betting remains illegal under state law, can open an account with a CFTC-registered platform and take a position on a football match with no state licence, no state tax, and none of the responsible gambling architecture Nevada or New Jersey require of a sportsbook. The state licensing regime built after Murphy v. NCAA in 2018 has not been repealed. It has been outflanked.
Global Context
This is not a speculative leap. It is where three converging pressures already sit today. In the United States, the CFTC and Department of Justice sued Arizona, Connecticut and Illinois in April 2026 to block their enforcement actions against prediction market operators, days before the Third Circuit ruled that federal jurisdiction over Kalshi’s sports contracts likely preempts state gambling law. Arizona had already filed criminal charges against Kalshi the previous month, the first criminal prosecution of a CFTC registrant, while Connecticut and Illinois have said they intend to keep defending their consumer protection authority regardless of the ruling. The Senate Commerce Committee’s consumer protection subcommittee heard on 20 May 2026 that these contracts ‘bear a strong resemblance to traditional sports betting’, with senators largely unswayed by industry arguments that they sit outside state gambling law. Weeks earlier, American Gaming Association chief executive Bill Miller had called the federal regulator policing them ‘a joke’ and the products themselves a ‘scourge’, arguing that licensed sportsbooks carry consumer protections, including a 21-plus age threshold, that these platforms do not.
The jurisdictional question is not new to gambling regulation, only new to the United States. The United Kingdom has run a comparable split for two decades: the Gambling Commission licenses sports betting, while spread betting on sporting outcomes is treated as a financial product and regulated by the Financial Conduct Authority under different consumer protection rules. That split has held, but it was built by statute, not decided in a single company’s litigation. Australia has gone the opposite way. In February 2026, the Australian Communications and Media Authority ruled that Polymarket’s contracts constitute gambling, rejected the company’s argument that they were a financial product, and ordered internet service providers to block Australian access. Two advanced regulatory systems, two opposite conclusions, both defensible, neither obviously wrong. That divergence is the strongest evidence that the American outcome is not predetermined by the underlying economics of the product. It is a function of which institution gets to answer the question first.
Strategic Implications
For operators, the scenario forces a capital allocation decision most boards have already started making without legal certainty. DraftKings told investors in its Q1 2026 results that prediction markets volume had reached an annualised $1 billion by April, with market making already profitable, and chief executive Jason Robins called it one of the fastest routes to profitability the company has launched. FanDuel is pursuing a dual track, acquiring customers directly in states where sports betting is not legal while market making on CME Group’s infrastructure. BetMGM and Caesars have taken the opposite view, warning that prediction market entrants are inflating acquisition costs and choosing to compete on product instead. Both postures carry real risk. The operators leaning in are betting federal preemption holds permanently. The operators standing back are betting Congress or the states reassert control, and that early movers into a legally contested product will carry exposure that outweighs the growth.
For state governments, the scenario threatens a fiscal line item entire budgets were built around, and for tribal gaming interests, it threatens compacts premised on sports betting staying inside a state’s regulatory perimeter. For investors, the question is starker. A capital structure calibrated to state-by-state licensing costs, tax rates and access fees behaves differently if the highest-margin product migrates to a federal regime with none of those costs attached. That is not a modest re-rating. It changes what the business is.
Possible Outcomes
The first trajectory is full federal consolidation. The Supreme Court declines to hear the case or affirms the Third Circuit, Congress does not legislate, and sports contracts settle into CFTC jurisdiction as practice. State sportsbook licensing survives for parlays, props and in-play betting but loses the simplest, highest-volume product to an unlicensed federal lane, and states cut the tax rates and fees they charge licensed operators to stay competitive, eroding the fiscal case for the whole regime.
The second is congressional correction. AGA lobbying, backed by tribal gaming interests and state regulators who see billions in compact and tax revenue at stake, produces legislation that either folds sports event contracts back into state gambling law or imposes federal age, advertising and problem gambling standards equivalent to what sportsbooks already carry. This closes the arbitrage without eliminating the product; it just re-prices it.
The third is prolonged fragmentation. The circuit split persists, other appellate courts disagree with the Third Circuit, and operators face years of jurisdiction-by-jurisdiction litigation risk. This is the worst outcome for governance: it rewards operators willing to tolerate ambiguity and penalises those who wait for clarity that never arrives.
The fourth is an Australian-style reversal, in which a shift in political weather, a high-profile problem gambling case, or a change in CFTC leadership produces a ruling that classifies these contracts as gambling after all, stranding capital built on the opposite assumption.
None of these outcomes is more probable than the others based on what is publicly known today, which is itself the point directors should sit with.
Boardroom Questions
1. If the product, our highest margin growth line, depends on is currently defined by a 2-to-1 appellate ruling rather than settled law, what is our actual exposure if that ruling does not survive review, and have we modelled it?
2. Are we building compliance and responsible gambling standards into a product because a regulator requires it, or because the absence of that requirement is itself the commercial opportunity, and can we defend that distinction publicly?
3. If federal and state authority over sports wagering diverges permanently, does our licensing footprint, tax exposure and government relations strategy still match the business we are actually running in three years, or the one we built our compliance function for a decade ago?
This Thought Experiment is a scenario-based exercise designed to provoke discussion. It is not a prediction or statement of fact.
Sources
1. Paul, Weiss, Rifkind, Wharton & Garrison, A Divided Third Circuit Holds That the CFTC Has Exclusive Jurisdiction Over Sports-Related Event Contracts, April 2026, https://www.paulweiss.com/insights/client-memos/a-divided-third-circuit-holds-that-the-cftc-has-exclusive-jurisdiction-over-sports-related-event-contracts
2. Forbes, Prediction Market Regulator Sues 3 States As Kalshi Wins In New Jersey, 9 April 2026, https://www.forbes.com/sites/jasonbrett/2026/04/09/prediction-market-regulator-sues-3-states-as-kalshi-wins-in-new-jersey/
3. CDC Gaming Reports, Tensions over prediction markets dominate Senate committee hearing, 20 May 2026, https://cdcgaming.com/brief/tensions-over-prediction-markets-dominate-senate-committee-hearing/
4. CDC Gaming Reports, AGA CEO Miller calls federal prediction market regulator ‘a joke’, 6 May 2026, https://cdcgaming.com/aga-ceo-miller-calls-federal-prediction-market-regulator-a-joke/
5. Gambling Insider, DraftKings, FanDuel Lean Into Prediction Markets on Q1 Earnings Calls; BetMGM, Penn, Caesars Forge Different Paths, 13 May 2026, https://www.gamblinginsider.com/news/159767/draftkings-fanduel-prediction-markets-q1-earnings-calls-betmgm-penn-caesars
6. Financial Conduct Authority and Gambling Commission, Memorandum of Understanding between the Gambling Commission and the Financial Conduct Authority, undated, https://www.fca.org.uk/publication/mou/gambling-commission-fca.pdf
7. CDC Gaming Reports, Australian regulator rules prediction markets are gambling, 6 February 2026, https://cdcgaming.com/brief/australian-regulator-rules-prediction-markets-are-gambling/