Core Principle 2 and Prediction Markets: The Legal Battle Shaping U.S. Regulation

Core principle 2: Prediction markets’ emerging number one argument. By Joshua Kirschner

Over the past few years, prediction markets have become a flashpoint in U.S. financial regulation. In fact, in its March 16, 2026 Advance Notice of Proposed Rulemaking, the CFTC notes that “From 2006-2020, DCMs listed for trading an average of approximately five event contracts per year.

In 2021, this number increased to 131, and the number of newly-listed event contracts per year remained at a similar level until 2025, when DCMs certified approximately 1,600 event contracts for listing for trading.” Prediction Markets, 90 Fed. Reg. 50, 12517 at n. 9 (proposed Mar. 16, 2026). Based on a quick browse of the CFTC website inventory of all self-certified and approved event contracts, a majority of these contracts are based on “weather events, political events, international events, scientific and cultural events, current events, and sporting events. Id.

As prediction platforms continue to list event contracts on political elections, sports outcomes, and other real‑world events, federal and state regulators have grappled with how to define the boundaries of what counts as a commodity, a futures contract, or even gambling.

In the midst of this uncertainty, regulators and prediction market platforms alike have raced to file suit in several key states, in hopes of creating favorable precedent. For prediction market platforms, one regulatory provision has unexpectedly emerged as the centerpiece of this fight: Core Principle 2, the Commodity Futures Trading Commission’s (“CFTC”) rule governing market access for designated contract markets (“DCM”). See 17 CFR § 38.151; see also Prediction Markets, 90 Fed. Reg. 50, 12518 at Section II(A)(2)(a)-(b) (proposed Mar. 16, 2026)

This article proceeds in three parts. First, it outlines the federal and state regulatory landscape in which prediction markets operate and the enforcement actions they currently face. Second, it examines the origins and development of the CFTC’s Core Principle 2. Third, it analyzes how federal and state courts have addressed arguments grounded in Core Principle 2 and considers the potential implications of its acceptance or rejection.

Federal and State Regulator Landscape

Regulatory scrutiny of prediction markets has increased in recent years at both the state and federal levels through a series of enforcement actions. As of the date of this article, the following states have active litigation involving futures contracts: Alabama, Arizona, California, Connecticut, Georgia, Illinois, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, Nevada, Ohio, South Carolina, Tennessee, Wisconsin. See Mick Bransfield, Summary of Legal Actions Involving Event Contracts, https://mickbransfield.com/2025/08/11/summary-of-legal-actions-involving-kalshis-sports-event-contracts/ (last updated Mar. 17, 2026). In several states it has been a race to file suit, beginning with state regulators and/or private individuals being the first to file a lawsuit against the prediction market platforms themselves. See, e.g., Class Action Complaint, Christopher Jennings v. Kalshi Inc., et al., Dkt. No. 2:26-cv-00071 (D. Ala. 2026); Class Action Complaint Kamana Keohohou, et al. v. Northern American Derivatives Exchange, Inc. d/b/a Crypto.com, et al., Dkt. No. 1:26-cv-20996 (D. Fla. 2026); Complaint for Permanent Injunction and Declaratory Relief, State of Nevada ex rel.

Image: Joshua L. Kirschner is an associate at Nelson Mullins Riley & Scarborough LLP. Based in Atlanta, Joshua focuses his practice on the gaming and gambling sectors and represents businesses and individuals in a wide variety of regulatory and white-collar litigation matters.

Nevada Gaming Control Board v. Blockratize, Inc. d/b/a Polymarket, et al., Dkt. No. 3:26-cv-00089 (D. Nev. 2026). In these types of lawsuits, prediction market platforms are alleged to be engaged in illegal gambling through offering a futures market in a particular state and, thus, in violation of a particular state’s sports gambling laws. See id.

In other states, prediction market platforms have initiated the lawsuit on the heels of regulators first issuing cease‑and‑desist letters from the state’s gaming enforcement authority, alleging violations of state sports‑wagering laws and directing platforms to halt operations within the state. See, e.g., Complaint for Permanent Injunction and Declaratory Relief, KalshiEX LLC v. William Orgel, et al., Dkt. No. 3:26-cv-00034 (D. Tenn. 2026) (alleging violation of Tenn. Code Ann. §§ 4-49-101 et seq.); Complaint for Permanent Injunction and Declaratory Relief, KalshiEX LLC v. Schuler, et al., Dkt. No. 2:25-cv-01165 (D. Ohio 2025) (alleging violation of R.C. Chapters 2915, 3767, 3775 and all similar rules); Complaint for Permanent Injunction and Declaratory Relief, KalshiEX LLC v. John A. Martin, et al., Dkt. No. 25-cv-1283 (D. Md. 2025) (alleging violation of Crim. Law Titles 12 and 13, SG §§ 9-lE-01, 9-lE-03, 9-lE-04, 9-lE-12, COMAR 36.10.01.02B and 36.10.14.01, Business Regulation § 14-113 and all similar rules); Complaint for Permanent Injunction and Declaratory Relief, KalshiEX LLC v. Mary Jo Flaherty, et al., Dkt. No. 1:25-cv-14723 (D. N.J. 2025) (alleging violation of N.J.S.A. § 5:12A-11, N.J. Const. art. IV, § 7, ¶ 2(D) and all similar rules); Complaint for Permanent Injunction and Declaratory Relief, KalshiEX LLC v. Kirk D. Hendrick, et al., Dkt No. 2:25-cv-00575 (D. Nev. 2025) (alleging violation of NRS 463.0193, 463.01962, 463.160, 463.245, 463.360, 465.086, 465.092, 293.830, Nevada Gaming Regulation 22.1205(3) and all similar rules).

However, some prediction market platforms have simply filed suit preemptively. See, e.g., Complaint for Injunctive Relief, KalshiEX LLC v. Robert Williams, et al., Dkt. No. 1:25-cv-08846 (D. N.Y. 2025) (filing suit after the New York State Gaming Commission threatened civil penalties and fines if Kalshi continued to offer certain futures contracts within New York); Complaint for Declaratory Judgment and Injunctive Relief, Coinbase Financial Markets, Inc. v. Dana Nessel, et al., Dkt. No. 4:25-cv-14092 (D. Mich. 2025) (filing suit prior to offering event-contract trading to users in Michigan).

In response, prediction markets have generally continued to operate and filed a lawsuit seeking both injunctive relief and a declaratory judgment permitting them to offer these types of futures contracts. See, e.g., Complaint for Permanent Injunction and Declaratory Relief, KalshiEX LLC v. William Orgel, et al., Dkt. No. 3:26-cv-00034 (D. Tenn. 2026) (alleging violation of Tenn. Code Ann. §§ 4-49-101 et seq.); Complaint for Permanent Injunction and Declaratory Relief, KalshiEX LLC v. Schuler, et al., Dkt. No. 2:25-cv-01165 (D. Ohio 2025) (alleging violation of R.C. Chapters 2915, 3767, 3775 and all similar rules); Complaint for Permanent Injunction and Declaratory Relief, KalshiEX LLC v. John A. Martin, et al.,Dkt. No. 25-cv-1283 (D. Md. 2025) (alleging violation of Crim. Law Titles 12 and 13, SG §§ 9-lE-01, 9-lE-03, 9-lE-04, 9-lE-12, COMAR 36.10.01.02B and 36.10.14.01, Business Regulation § 14-113 and all similar rules); Complaint for Permanent Injunction and Declaratory Relief, KalshiEX LLC v. Mary Jo Flaherty, et al., Dkt. No. 1:25-cv-14723 (D. N.J. 2025) (alleging violation of N.J.S.A. § 5:12A-11, N.J. Const. art. IV, § 7, ¶ 2(D) and all similar rules); Complaint for Permanent Injunction and Declaratory Relief, KalshiEX LLC v. Kirk D. Hendrick, et al., Dkt No. 2:25-cv-00575 (D. Nev. 2025) (alleging violation of NRS 463.0193, 463.01962, 463.160, 463.245, 463.360, 465.086, 465.092, 293.830, Nevada Gaming Regulation 22.1205(3) and all similar rules). Once the lawsuit has been filed by the prediction market platform, they routinely seek a preliminary injunction and/or temporary restraining order against the state agency that sent the cease-and-desist letter to maintain the ability to offer contracts during the litigation. See, e.g., KalshiEX LLC v. Mary Jo Flaherty, et al., Dkt. No. 25-1922 (3rd Cir. 2025); KalshiEX LLC v. John A. Martin, et al., Dkt. No. 25-1892 (4th Cir. 2025). While many of these cases are still active, those in which the court has already decided the prediction market platform’s preliminary injunction have quickly led to an appeal. See, e.g., Plaintiff’s Notice of Appeal, KalshiEX LLC v. John A. Martin, et al., Dkt. No. 25-cv-1283 (D. Md. 2025) (appealing denial of Kalshi’s motion for preliminary injunction to the Fourth Circuit); Notice of Appeal to the U.S. Court of Appeals for the Third Circuit, KalshiEX LLC v. Mary Jo Flaherty, et al., Dkt. No. 25-cv-02152 (D. N.J. 2025) (appealing grant of Kalshi’s motion for preliminary injunction to the Third Circuit).

Regardless of who initiates the lawsuit, the theory of the prediction market platforms is largely the same: the state should not and cannot enforce its state-specific gambling laws when prediction markets are only subject to CFTC oversight.

The Origin and Development of the CFTC’s Core Principle 2

In 1974, Congress established the CFTC as an independent federal agency and charged it with administering and enforcing the Commodity Exchange Act (“CEA”). 7 U.S.C. §§ 1-26. Since then, the CFTC has overseen U.S. derivatives markets with a mandate to promote market integrity, mitigate systemic risk, and protect customers. To meet these objectives, the agency requires registered exchanges to maintain robust surveillance systems, implement compliance and reporting protocols, and enforce rules designed to prevent manipulation and abusive trading practices.
A central component of the CFTC’s regulatory authority is its power to determine whether a trading platform qualifies as a DCM. Platforms seeking DCM status must submit apply with the CFTC and demonstrate that they satisfy a detailed set of statutory and regulatory criteria. How to Become a Designated Contract Market,

https://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/dcmhowto.html. Once designated, DCMs operate under continuous CFTC oversight and are permitted to list futures and options contracts on a wide range of subjects, provided the contracts comply with the CEA and CFTC regulations.

An illustrative example came in November 2020, when the CFTC granted Kalshi full DCM status. CFTC Designates KalshiEX LLC as a Contract Market, (Nov. 4, 2020), https://www.cftc.gov/PressRoom/PressReleases/8302-20. This designation authorized Kalshi to operate under the same regulatory framework that governs traditional futures exchanges, subjecting it to the full suite of compliance, reporting, and market‑integrity obligations applicable to all DCMs.

To ensure consistent regulatory standards, the CFTC promulgated 23 Core Principles that every DCM must satisfy as a condition of maintaining its designation. These principles collectively establish requirements related to market integrity, financial safeguards, disclosure practices, surveillance capabilities, and protections against manipulation. John O’Connell, Prediction Markets Find Their Regulatory Footing, But the Boundaries Remain Clear, WEALTH MANAGEMENT (Dec. 15, 2025), https://www.wealthmanagement.com/advisor-support-platforms/prediction-markets-find-their-regulatory-footing-but-the-boundaries-remain-clear.

Among these, Core Principle 2 has become particularly significant. It requires that a DCM “provide its members, persons with trading privileges, and independent software vendors with impartial access to its markets and services,” thereby ensuring that market access is nondiscriminatory and consistent with fair‑competition norms. See 17 CFR § 38.151(b). This means, and as Kalshi has argued numerous times, that if a particular state requires a gaming license to offer futures contracts within a state, Kalshi cannot impartially offer its futures contracts unless it is granted a license. This also means that if a particular state does not allow futures contracts for certain events (i.e., political elections, sports, etc.), then Kalshi would be in violation of Core Principle 2 if it offered futures contracts in, for example, Massachusetts but did not do so in Nevada. See Plaintiff’s Motion and Memorandum of Points and Authorities in Support of an Immediate Temporary Restraining Order and Preliminary Injunction, KalshiEX LLC v. Kirk D. Hendrick, et al., Dkt No. 2:25-cv-00575 (D. Nev. 2025).

While the CFTC has long required DCMs to abide by Core Principle 2, its emergence as a key argument by prediction market platforms has positioned it as a pivotal element in the regulatory debate over CFTC versus state oversight.

Legal Implications of the Core Principle 2 Argument

Leading the charge for the Core principle 2 argument, Nevada, and the Ninth Circuit in particular, has been an active player in prediction market litigation. In Hendrick, Kalshi argued that since Nevada does not allow any platform to over futures contracts on pollical election outcomes, Kalshi cannot offer impartial access to users in Nevada, where this futures contract is offered elsewhere. See id. As Kalshi suggests, cutting off access to users in Nevada from being unable to utilize sports and political event futures contracts would be a “market disruption” in violation of Core Principle 2. See id. In granting Kalshi’s preliminary injunction, the United States District Court for the District of Nevada stated:
Kalshi thus faces a ‘Hobson’s choice’: if it does not comply with the defendants’ demand to cease it faces civil and criminal liability, but if it does comply it will incur substantial economic and reputational harm as well as the potential existential threat of the CFTC taking action against it for violating the CFTC’s Core Principles if Kalshi disrupts contracts or geographically limits who can enter contracts on what is supposed to be a national exchange.

See Order (1) Denying Defendants’ Motion for Temporary Restraining Order and (2) Granting Plaintiff’s Motion for Preliminary Injunction, KalshiEX LLC v. Kirk D. Hendrick, et al., Dkt No. 2:25-cv-00575 (D. Nev. 2025).

A similar argument was raised by Crypto.com (“Crypto”) in North American Derivatives Exchange, Inc. d/b/a Crypto.com | Derivatives North America v. Kirk D. Hendrick, et al. Crypto argued that it very well may be impossible to both comply with Nevada law and the CFTC’s core principles, if it is required to exclude certain futures contracts from users in Nevada, while also offering those same futures contracts elsewhere across the country. See Plaintiff’s Motion for Preliminary Injunction, North American Derivatives Exchange, Inc. d/b/a Crypto.com | Derivatives North America v. Kirk D. Hendrick, et al., Dkt. No. 2:25-cv-00978 (D. Nev. 2025). In response, Hendrick merely stated that this argument is without merit since the CFTC has not taken or threatened to take any enforcement action against Crypto for allegedly violating Core Principle 2. See Defendants’ Opposition to Motion for Preliminary Injunction, North American Derivatives Exchange, Inc. d/b/a Crypto.com | Derivatives North America v. Kirk D. Hendrick, et al., Dkt. No. 2:25-cv-00978 (D. Nev. 2025). Notably, however, unlike Hendrick, Crypto’s motion for preliminary injunction was denied, largely on other grounds, which led to an appeal by Crypto before the Ninth Circuit.

A similar argument has arisen in Tennessee and Maryland. In the United States District Court for the District of Tennessee, the court granted Kalshi’s motion for preliminary injunction, premised, in part, on Kalshi’s Core Principle 2 argument. See Memorandum, KalshiEX LLC v. William Ogel, et al., Dkt. No. 3:26-cv-00034 (D. Ten. 2026). The court reasoned Kalshi would likely prevail on its impossibility argument because Kalshi cannot on the one hand abide by the CFTC’s impartiality requirement and on the other hand restrict Tennessee users from participating in sports-related futures contracts through geolocation and geofencing measures. See id.

Conversely, in KalshiEX LLC v. Martin, the United States District Court of Maryland rejected Kalshi’s Core Principle 2 argument. KalshiEX LLC v. Martin, 793 F.Supp.3d 667 (D. Md., 2025). There, the Maryland Lottery and Gaming Control Commission (“MLGCC”) had sent Kalshi a cease and desist letter, demand that Kalshi stop offering event contracts in Maryland concerning sports. See id. at 674. In response thereto, Kalshi made four arguments, including the MLGCC’s cease and desist letter conflicted with the CFTC’s Core Principle 2. See id. at 686. In essence, Kalshi suggested that if it were to comply with this demand and cease offering sports relate futures contracts to Maryland citizens, it would be violating Core Principle 2 by not offering impartial access to all users. See id. The court, however, was unconvinced. The court went so far as to state that “the CFTC’s Core Principles and Maryland’s gaming laws worked in tandem.” See id In sum, the court determined that if Kalshi obtained a proper Maryland license – which the court recognized Kalshi did not want to do – then Kalshi could both abide by Maryland gaming law and be in compliance with Core Principle 2. See id

The Core Principle 2 argument has even been utilized by the CFTC itself. As recently as February 17, 2026, the CFTC advanced the Core Principle 2 argument in an amicus brief filed in support of Crypto.com in the United States District Court for the District of Nevada. Amicus Brief of Commodity Futures Trading Commission, a Federal Government Agency, in Support of Appellant and in Support of Reversal, North American Derivatives Exchange, Inc. d/b/a crypto.com | Derivatives North America v. the State of Nevada, et al., Case. No. 25-7187 (9th Cir. 2026). The CFTC made clear that “[i]f a state bans the contract, the DCM cannot fulfill its federal mandate to provide impartial national access” as required by Core Principle 2. See id. Around this same time, CFTC Chairman, Michael S. Selig, also published an op-ed in The Wall Street Journal addressing these same concerns and further arguing that the CFTC should remain the oversight regulator of events contracts. Michael S. Selig, States Encroach on Prediction Markets, Wall St. J. (Feb. 16, 2026). Such statements send a clear message: the CFTC seeks to remain the sole oversight authority to DCMs and futures contracts.

While courts remain divided on the viability of the Core Principle 2 argument, including several which have now ruled in opposite directions, and with multiple appeals pending across the country, the ultimate outcome of the Core Principle 2 argument is far from settled. If courts ultimately adopt the position that prediction market platforms cannot abide by both the CFTC’s regulations and state law, the implications would be significant. Prediction market platforms and any platform seeking to offer event‑based futures contracts would fall squarely and exclusively under CFTC oversight. In practical terms, a platform wishing to offer such contracts would need to operate as a CFTC‑regulated DCM, and state gaming laws could not be used to restrict access to federally approved futures contracts. On the other hand, if courts ultimately conclude that prediction market platforms are required to abide by both the CFTC and state-specific laws on gambling, prediction market platforms will face an existential choice: apply for state-specific licenses across the country to maintain compliance with state gambling laws or cease operation of certain futures contracts all together.

The question as to exactly what sort of “impartial access” needs to be granted in a jurisdictional and geographic sense has been posed to the general public as part of the CFTC’s March 16, 2026 Proposed Rulemaking. Prediction Markets, 90 Fed. Reg. 50, 12518 at Section II(A)(2)(a) (proposed Mar. 16, 2026). In sourcing public comment, the CFTC asks “What aspects of prediction markets affect how a DCM provides impartial access and prohibits abusive trade practices? Are there potential barriers to impartial access that the Commission should consider?” Id. Therefore, in a move befitting prediction markets, it may be that some of our first answers to the implications and breadth of Core Principle 2 will come from the wisdom of the crowds submitting public comment in the coming weeks.

Conclusion

Prediction markets sit at the intersection of federal commodities law, state gambling statutes, and emerging questions about offering impartial access across the country. As courts continue to grapple with the boundaries of federal preemption, states’ rights, and the nature of futures contracts, Core Principle 2 may ultimately determine whether prediction markets maintain their status as a mainstream financial product or remain trapped in regulatory limbo.