On Jan. 9, Tennessee’s sports betting regulator sent a set of letters that, at first glance, looked like the kind of paperwork most crypto natives scroll past.
The message was blunt: stop offering sports-related event contracts to Tennessee residents, void unsettled positions, and refund customers by Jan. 31.
The recipients, Kalshi, Polymarket, and Crypto.com, sit on the border between finance and gambling.
A “yes/no” trade on a game outcome can be framed either as a federally regulated derivative or as an unlicensed sportsbook.
Within days, the fight moved to federal court.
A US district judge in Nashville, Aleta Trauger, issued a temporary restraining order blocking Tennessee from enforcing its cease-and-desist against Kalshi while the case proceeds. She also set a Jan. 26 hearing on a longer-lasting injunction.
Tennessee says the company is running an illegal gambling operation without a state license and allowing underage betting.
Kalshi says Tennessee is trying to regulate products that fall under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC).
The immediate story is a state crackdown and a compliance deadline.
The larger story is a jurisdictional stress test: Can a state sports wagering council fence off contracts that a federally designated exchange claims it has the right to list nationwide?
If states keep pushing, what happens to the most promising new retail funnel crypto has found since memecoins: an interface that turns current events into tradable contracts?
The jurisdiction fight: who gets to decide what this is?
We need to begin with the uncomfortable fact that both sides have a credible-sounding legal theory.
From Kalshi’s perspective, it’s not a sportsbook. It’s a designated contract market, the CFTC’s term for an exchange regulated under the Commodity Exchange Act, akin to a traditional futures venue that can serve retail participants.
The CFTC has publicly described designated contract markets as exchanges operating under its oversight.
In 2020, the agency announced it had granted KalshiEX an order of designation as a contract market.
Kalshi’s legal argument leans on a powerful clause in federal commodities law: the CFTC “shall have exclusive jurisdiction” over certain derivatives transactions, including those traded on a designated contract market.
That language exists because Congress wanted one national referee for derivatives, rather than 50 state rulebooks.
From Tennessee’s perspective, none of that matters if the product, in substance, is sports wagering.
The Tennessee Sports Wagering Council (SWC) regulates sports betting under state law, including who can bet (the letters and related reporting cite more than 21 requirements), what consumer protections apply, and what taxes licensed operators must pay.
The SWC accused the platforms of offering sports contracts without a license, violating state eligibility rules, and lacking required protections.
It is all language that frames event contracts as a consumer and public-interest problem rather than a financial innovation.
This is where prediction markets collide with America’s peculiar regulatory geography: derivatives are mostly federal, and gambling is mostly state.
Sports betting, in particular, is intensely local.
If a product can plausibly be described as either a derivative or a wager, the question becomes which system is allowed to define it first.
Tennessee’s case arrives after a headline-making loss for Kalshi in Nevada, where a federal judge concluded the platform was subject to state gaming rules, a decision Kalshi appealed.
That Nevada ruling undercuts the clean “federal preemption” story and emboldens states that see sports contracts as a workaround around licensing regimes they fought to build.
At the same time, the CFTC itself has sent mixed signals, partly by design.
On its website, the agency describes event contracts as derivatives whose payoff is based on specified events (economic indicators, weather, damages from a hurricane).
It also emphasizes that CFTC Regulation 40.11 prohibits event contracts that reference terrorism, war, gaming, or activities unlawful under state or federal law, among other categories.
Gaming is the fulcrum. If sports outcome contracts are seen as “gaming,” they’re in the forbidden zone.
If they’re framed as “information contracts” with economic utility, they belong in the tradable universe the CFTC oversees.
In 2025, the CFTC issued an advisory noting that sports-related event contracts listed on designated contract markets had been listed via self-certification.
The advisory said the Commission had not, to date, taken official approval action on listing sports-related event contracts under certain CEA provisions.
While the advisory had little practical impact on the market, its language reads like a regulator leaving itself room to intervene later.
So when Tennessee draws its line, it isn’t just daring Kalshi, Polymarket, or Crypto.com.
It’s testing whether the federal system will defend the premise that a nationally regulated derivatives exchange can list sports-related contracts, and whether the CFTC will tolerate the category becoming a parallel sportsbook industry.
Compliance theater: what platforms do when the law is both everywhere and nowhere
The popular version of compliance is a checklist: follow the rules, file the forms, move on.
That works when the rules are clear and the regulator is singular.
But prediction markets don’t have that luxury.
They operate in a jurisdictional overlap, and the overlap produces a distinct kind of compliance behavior.
You might call it compliance theater, not because it’s fake, but because it’s performative.
Every move you make, and every word you say in the compliance theater, sends a message about who you think has authority.
If a platform receives a cease-and-desist letter and immediately geofences the state, refunds users, and voids contracts, it reduces legal exposure and avoids penalties.
But it also concedes, in practice, that the state regulator’s theory is enforceable.
If it refuses, it may preserve its legal position, but it risks escalating enforcement, including civil fines and potential criminal referrals.
It may also have to spend months in court to keep operating.
Reporting on the Tennessee letters described potential civil penalties of up to $25,000 per violation for noncompliance.
Kalshi chose to litigate.
Reuters reports the company argued Tennessee was unconstitutionally trying to ban contract trading on its platform.
The judge’s temporary restraining order suggests the court thinks Kalshi may have a real case, at least at this early stage.
But even a win has costs. Litigation is slow, and markets are fast.
If an exchange is in court in eight states at once, as Reuters reported Kalshi has been, then operational certainty becomes a scarce resource.
Compliance teams, product roadmaps, and partnerships all get shaped by what the next state might do.
The theater aspect shows up in product design, too.
Platforms can raise minimum ages, add “responsible gambling” tools, improve AML processes, and tighten geo-controls as much as they want.
But each change can be read two ways.
A state regulator may say: You’re admitting this is gambling.
A federal-derivatives advocate may say: You’re acting like a mature market operator, the way brokerages do when they restrict certain risky products.
This is why the Tennessee letters matter beyond Tennessee.
A state-by-state enforcement approach creates market fragmentation.
Liquidity gets chopped into permitted jurisdictions, user experience deteriorates, affiliate distribution becomes harder, and the product category stops looking like a nationwide market.
Instead, it starts to look like an app with 50 different versions.
That fragmentation is exactly what crypto-native distribution was supposed to avoid.
Information market or sports betting: the category identity crisis
In financial regulation, products are often judged by their economic purpose and their market structure.
Futures and options exist not just to speculate but to hedge, discover prices, and transfer risk.
Gambling laws, by contrast, are built around consumer harm, addiction risk, and the integrity of games.
Event contracts can plausibly claim the first angle when the event is economic.
A contract that settles on a CPI print, for example, can be used to hedge inflation exposure or express a view on macro risk.
That framing aligns with how the CFTC describes event contracts on its site, as macroeconomic indicators are one of the examples it provides.
Sports are harder.
What economic risk is being hedged by a binary contract on the outcome of a football game?
Some advocates argue sports markets aggregate dispersed information (injuries, weather, strategy) and can serve as high-signal prediction tools.
Critics counter that the simplest explanation is the correct one: it’s a wager on a game, offered in a wrapper that conveniently avoids sportsbook licensing.
The law anticipates this disagreement.
The CFTC’s 40.11 rule is explicit about restricting event contracts tied to “gaming,” and it also ties prohibition to activities that are unlawful under state or federal law.
That is exactly the lever Tennessee is pulling.
Here is the tricky part for platforms: even if they believe sports contracts are permissible derivatives, the public-policy case for them is weaker than the case for election odds or inflation markets.
That matters because the CFTC’s authority in this area is more than just technical; it’s public-interest flavored.
Reuters reported in 2024 that the CFTC proposed changes to its event contract rule, reflecting legal pressure and the need to better justify why certain categories should be treated as contrary to the public interest.
The underlying theme is that “Can we list it?” isn’t just a statutory question; it’s also a reputational one.
Now add crypto to the mix.
The retail market wants a product that feels intuitive, social, and immediate: a trade you can understand without learning AMMs or reading a whitepaper.
Sports event contracts are that product.
They sit at the intersection of fandom, real-time information, and the dopamine loop of a simple yes/no outcome.
That’s why the Tennessee letters target the exact format that could rebuild crypto’s mainstream attention without asking users to care about blockspace.
Which is also why states are reacting.
Sports betting is a tightly regulated and extremely lucrative ecosystem.
If a federally regulated exchange can offer an adjacent product nationwide without state licensing, it threatens the gatekeeping model that states rely on: taxes, consumer controls, and a controlled operator list.
Even if the “event contracts” on these platforms are smaller in scale today, the precedent is large.
What happens next
If Kalshi wins in Tennessee and similar states, the category gets a shot at legitimacy.
Then the pressure shifts to the CFTC to clarify whether sports contracts are compatible with its public-interest mandate.
If states keep winning, platforms will either retreat into geofenced compliance, turning national liquidity into local pools, or push users toward workarounds that regulators can’t easily monitor.
The most likely near-term outcome is neither a clean federal victory nor a total state shutdown, but a messy middle.
Expect patchwork availability, periodic enforcement flashes, and a constant identity argument in which “information markets” and “sports betting” keep swapping masks depending on the courtroom.
And that, more than the Jan. 31 refund deadline, is what makes Tennessee’s letters a real market-structure story.
They are forcing the industry to answer a question it has tried to postpone: In America, is a tradable yes/no contract on a game a financial instrument, or just gambling with better UX?
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