As of mid-January 2026, the meteoric rise of prediction markets has hit a significant jurisdictional wall. Despite record-breaking daily trading volumes exceeding $700 million, the industry is currently navigating a chaotic "checkerboard" of state-level regulation that threatens to fragment the market. While federal courts have largely cleared a path for political and event-based derivatives, state lawmakers and gambling regulators are fighting back, arguing that these platforms are essentially unlicensed sportsbooks masquerading as financial exchanges.
The tension reached a boiling point this week with the reintroduction of the Oversight and Regulation of Activity for Contracts Linked to Events (ORACLE) Act in New York. The bill, which seeks to prohibit residents of the Empire State from wagering on everything from local elections to the outcome of military conflicts, represents the most aggressive legislative push against the industry to date. Traders are currently pricing in a high degree of uncertainty, with sentiment on platforms like Manifold showing an 81% confidence in federal preemption in some states, while others, like Nevada, have already successfully shuttered major exchange operations.
The Market: What's Being Predicted
The primary "market" currently occupying the minds of industry participants isn't just a single contract, but the legal survival of the industry in the United States' most lucrative jurisdictions. On Manifold and niche regulatory sub-markets on Polymarket, traders are aggressively betting on whether platforms like Kalshi and Interactive Brokers (NASDAQ: IBKR) will be forced to implement permanent "geofencing" to block users in New York, Nevada, and New Jersey.
Currently, the focus is on two key legal fronts:
- The New Jersey Preemption Fight: Traders are currently giving Kalshi an 81% probability of winning its lawsuit against New Jersey regulators. This optimism stems from a late-2025 preliminary injunction where a district court suggested that the federal Commodity Exchange Act (CEA) likely overrides state-level gambling laws for CFTC-regulated exchanges.
- The Ninth Circuit Appeal: In Nevada, the outlook is bleaker. Following a November 2025 ruling by U.S. District Judge Andrew Gordon, which labeled Kalshi’s sports-related contracts as illegal gaming, the exchange has moved to the Ninth Circuit Court of Appeals. Analysts describe this as a "toss-up," with many expecting the court to uphold the state's right to regulate gambling within its borders.
Trading volume in these regulatory-focused markets has surged, as institutional players look to hedge their exposure to the platforms themselves. Total monthly notional volume for the industry now regularly exceeds $2 billion, even as the threat of state-level bans looms.
Why Traders Are Betting
The surge in betting volume is driven by a fundamental disagreement between federal regulators and state gaming commissions. Following the CFTC's decision to drop its appeal against Kalshi in May 2025, the federal path for election and macro-economic markets seemed clear. However, state regulators—often pressured by the traditional gambling lobby—have pivoted to a different strategy: classifying event contracts as "sports wagering" or "contest of chance" under century-old state statutes.
Pro-market traders point to the Unlawful Internet Gambling Enforcement Act (UIGEA) carve-out for CFTC-regulated exchanges as their primary defense. They argue that if a market is approved at the federal level as a financial derivative, states cannot legally block it. On the other side, figures like former New Jersey Governor Chris Christie, now an advisor to the American Gaming Association, argue that prediction markets are "cannibalizing" the regulated sports betting industry without paying the requisite taxes or adhering to consumer protection standards.
This conflict has forced major players like Robinhood Markets, Inc. (NASDAQ: HOOD) and Crypto.com to play it safe, with both firms reportedly halting certain "high-risk" event contracts in states with active litigation. The volatility in these markets is no longer just about the outcome of the events themselves, but whether the trade will even be allowed to settle before a state attorney general intervenes.
Broader Context and Implications
The regulatory squeeze isn't limited to the United States. In early January 2026, the Ukrainian government officially blocked access to Polymarket via Resolution No. 695. While the official reason was a lack of a local gambling license, the move was largely driven by ethical concerns over "war-related bets." Polymarket had hosted high-liquidity markets predicting the specific dates of city occupations in the Donbas region, which Ukrainian officials characterized as "exploitative" and "detrimental to national morale."
This international backlash highlights a growing rift in the prediction market philosophy:
- The Information-Efficacy School: Proponents argue that markets on war and catastrophe provide the most accurate, real-time data for intelligence and humanitarian efforts.
- The Social-Harm School: Regulators argue that profiting from tragedy is inherently "contrary to the public interest," a clause the CFTC has historically used to try and block markets.
In New York, the ORACLE Act takes the social-harm argument to the extreme, proposing a total ban on markets related to death, terrorism, and "catastrophic events." If passed, it would set a precedent that could see the prediction market industry split into two: a "clean" market for economic data and a "gray" market for everything else.
What to Watch Next
The coming weeks will be pivotal for the industry's legal standing. The first major milestone is the decision by the New York Senate Racing, Gaming & Wagering Committee on whether to advance the ORACLE Act. Industry eyes are on Senator Joseph Addabbo Jr., whose support or opposition could determine the bill's fate. If the bill reaches the floor, expect a massive lobbying push from both the "Big Three" exchanges and the traditional gaming industry.
Secondly, the Ninth Circuit's decision on Kalshi’s emergency stay in Nevada is expected by late February 2026. A loss there would likely trigger a wave of similar cease-and-desist orders from other states, potentially forcing platforms to adopt a "state-by-state" licensing model similar to DraftKings or FanDuel.
Finally, the industry is watching for any movement toward the U.S. Supreme Court. With conflicting rulings now emerging from different federal circuits regarding state preemption, many legal experts believe a final resolution won't be reached until 2027, leaving the market in a state of high-stakes limbo until then.
Bottom Line
The current regulatory landscape for prediction markets is a classic battle of "the new world vs. the old." While the technology has proven its ability to aggregate information more efficiently than traditional polling or expert analysis, it has run headlong into the complex web of American federalism and the entrenched interests of the $100 billion gambling industry.
The ORACLE Act and the blocks in Ukraine suggest that "unregulated" prediction markets may be a thing of the past. The future likely belongs to platforms that can successfully navigate the transition from "disruptive startup" to "regulated financial utility." For traders, the "alpha" in 2026 isn't just in predicting the next Fed rate cut or election result—it’s in predicting which states will let them keep their winnings.
This article is for informational purposes only and does not constitute financial or betting advice. Prediction market participation may be subject to legal restrictions in your jurisdiction.
PredictStreet focuses on covering the latest developments in prediction markets. Visit the PredictStreet website at https://www.predictstreet.ai/.
