Congress, state regulators, and the prediction market industry itself agree that casino-related prediction market contracts should be off limits. But as that door closes, a gaming lawyer says that a window may be opening for a new generation of gray-area casino products that neither the CFTC nor state gambling law is clearly positioned to reach. The template already exists: historical horse racing (HHR) machines use past race results to power slot-like games in more than a dozen states without a casino license. Prediction market contracts could serve the same function, and it’s not just hypothetical.
“This is something I am sure people are talking about and thinking about right now,” said Stephen Piepgrass, a gaming regulatory attorney and partner at Troutman Pepper Locke. “The HHR model is one that I think could be very readily translated into the prediction market space, and I would anticipate there are businesses that are thinking about how to do that right now.”
What Piepgrass is describing isn’t a prediction market on a roulette spin, a contract type even the prediction market industry’s own coalition has moved to prohibit. “These business models would not allow people to trade on the prediction markets with a casino-style overlay; It’s actually something different from that,” Piepgrass told DeFi Rate. “It’s using, probably past predictions, just like historical horse racing, as the background input for the model.”
The model being contemplated is a gray-area casino product layered on top of legitimate federal derivatives, using permissible CFTC-listed event contracts as the outcome engine for casino-style games without going through a regulated exchange at all. The precedent is already live. GiddyUp took the HHR model online earlier this year, operating under an Oregon Racing Commission parimutuel license. Swap the horse race for a federal funds rate decision or a CPI reading, and the model translates directly. As for whether current or proposed legislation closes that gap, Piepgrass doesn’t think so.
“I don’t see the current legislation being the type of framework that would address this.”
A familiar playbook and a narrow window
The gray-zone pattern is one the gaming industry has seen play out repeatedly. “Every time you change the facts slightly, the legal overlay that applies to those facts is now imperfect,” Piepgrass said.
What’s changed each time isn’t the fundamental logic, but rather the technology and legal wrapper. And each iteration has given operators a window to scale before regulators caught up. Much like the models that came before, the financial incentive for operators to operate in the gray is real.
“I think it would take off very quickly as soon as the first one comes out,” Piepgrass said. “I think before we know it, everyone’s going to be doing it.” While the window may be shorter now given the current intense regulatory scrutiny around prediction markets, even a tight window could provide sufficient incentive for operators.
“I think the window is narrower than what it’s been in the past for operating in this zone, but I do think there’s a lot of money that could be made in a small window.”
The modern gray-zone casino industry traces its roots to internet sweepstakes cafes that began proliferating across the south around 2005. These establishments sold internet time, with casino-style sweepstakes entries attached. The product looked like a slot machine. The legal argument was that customers were buying internet access and receiving sweepstakes entries as a bonus, satisfying the “no purchase necessary” requirement that removes the “consideration” element of gambling. The model spread to at least 20 states before facing criminal complaints and bans. It eventually migrated online, spawning the modern sweepstakes casino industry championed by major operators like Chumba, McLuck and Stake.us, which itself ran for years before Montana became the first state to successfully ban them in May 2025, followed by eight others so far.
Pennsylvania has been fighting a paralell battle with skill games, electronic terminals in bars and gas stations that use a game-of-skill overlay to argue they fall outside the definition of slot machines. Governor Shapiro has estimated roughly 70,000 unregulated terminals currently operate across the commonwealth. Years of litigation have yet to produce a definitive resolution.
Then there’s historical horse racing. HHR machines, the direct template for what Piepgrass says operators are now exploring, originated at Oaklawn Park in Arkansas in 2000 and expanded from there. A player places a wager and animated reels spin, just like a slot machine. The catch is that the outcome is determined not by a random number generator but by the result of an anonymized, previously run horse race drawn from a historical database. To a casual observer, it is functionally indistinguishable from a slot machine. Legally, operators argued, it was a pari-mutuel wager on a horse race, and therefore covered by horse racing law rather than casino gaming law.
The Kentucky Supreme Court struck down HHR in 2020, ruling the machines didn’t genuinely preserve the pari-mutuel structure. The legislature responded not by redesigning the product but by rewriting the definition of “pari-mutuel wagering” to explicitly include “previously-run” or historical races. Approximately $10.5 billion was wagered on HHR machines in Kentucky during fiscal year 2025, roughly five times pre-legalization levels. The model now operates in Virginia, Wyoming, New Hampshire, and several other states with parimutuel wagering laws.
GiddyUp Games, a brand operating under KHK Games, Inc., brought the model online in 2026, running the same structural logic across 17 states under an Advanced Deposit Wagering (ADW) license from Oregon. The company’s CEO, Jon Kaplowitz, told PlayUSA, “By using live horse racing as the basis for its games, GiddyUp provides a safe, compliant option for players seeking legal real-money gaming alternatives.”
The Kentucky Law Journal captured the gray area construct as well as any. “Whether a new wagering technology is permissible often turns less on how it functions and more on how the law chooses to define it,” wrote KLJ editor Jay McCormick.
Internet cafes weren’t gambling; they were selling internet time. Sweepstakes casinos aren’t gambling; they’re promotional contests. Skill games aren’t slots because they require skill. HHR machines aren’t slots; they’re horse racing wagers. Each time, the product functions like casino gambling, but a legal label creates the distinction.
The prediction-market-powered casino model could be the next iteration. It’s not a casino game, proponents will argue, but a CFTC-regulated financial instrument with a gaming interface on top.
Gaming guidelines under the CFTC
The CEA’s gaming special rule, Section 5c(c)(5)(C), gives the CFTC authority to prohibit event contracts involving “gaming” as contrary to the public interest. CFTC Rule 40.11(a) in 2011 listed a categorical prohibition on listing of contracts that “involve, relate to, or reference” gaming on registered exchanges. Interpretations have broadly converged on the “gaming” prohibition encompassing casino-style games like slots, roulette and blackjack. But “gaming” itself has never been formally defined in statute or rule, a gap the CFTC acknowledged when it opened its March 2026 Advanced Notice of Proposed Rulemaking (ANPRM) and asked the public to define it. The CFTC’s own 2024 attempt to define “gaming” in rulemaking was withdrawn before taking effect, resulting in one of a number of regulatory gaps currently playing out in courts.
What hasn’t been addressed in court or in regulation is what happens when a permissible CFTC contract powers a casino game rather than being listed as a casino game contract itself. Peter Sanchez Guarda, a derivatives lawyer and former CFTC attorney, thinks the CFTC has the tools to keep such products off registered exchanges. One reason is that casino-game applications fail the basic economic function test that has anchored CFTC jurisdiction since before the agency existed.
“I don’t think the CFTC would permit an exchange to offer these ‘contracts’ because they have no economic function,” Sanchez Guarda said. He notes that with some sports-related contracts, there’s at least a hedging and price discovery argument. For example, a team’s playoff status might affect hotel occupancy, advertising revenue, TV ratings and so forth. But casino game outcomes are categorically different.
“Spins of a roulette wheel have no price discovery. Past spins don’t affect future spins, and the odds aren’t changed by knowledgeable bettors. They also have no hedging function,” said Sanchez Guarda. “The same is true for sweepstakes. So they lack the connection to commerce that has been a requirement for legality since before the CFTC existed.”
He points to Irwin v. Williar, an 1884 Supreme Court case he describes as one “most people don’t know about.” In it, the Court held that contracts where parties intend only to pay the difference in price, with no intention of actual delivery, are wagering contracts, not legitimate commercial instruments. The case predates the CFTC entirely, and established that using a financial market price as the reference doesn’t transform a gambling product into a financial one.
The same logic, Sanchez Guarda argues, applies to any attempt to layer a casino game on top of a CFTC-regulated contract. “In the old days the ‘numbers racket’ where the mafia would collect bets and payout based on a number like the total number of bets of a racetrack, was gambling,” he said. “If it was based on the closing price of the S&P 500 index, it would still be gambling, not a securities violation. I think the outcome would follow for the CFTC.”
Where the analysis gets more complicated is the application layer with the casino game built on top of, rather than listed on, a CFTC exchange. “If the outcome of a CFTC contract was used to generate a random number that offered a payout, that would seem to be gambling that is covered by the state’s authority,” Sanchez Guarda said.
Outside of CFTC reach?
If an operator built the product entirely outside the DCM framework, Sanchez Guarda’s read is that “The CFTC would not have enforcement authority.”
The reason comes down to market impact. The CFTC can reach beyond the exchange when downstream activity distorts the exchange market itself. That’s why it pursued banks for manipulating LIBOR, the interest rate benchmark that underpinned trillions of dollars in exchange-traded derivatives, and why misreporting natural gas prices can fall under CFTC jurisdiction when it moves futures contract prices. In both cases, the downstream conduct corrupted what was happening on the exchange.
As Sanchez Guarda explains: “The CFTC governs exchange trading of commodities, not what happens to the underlying commodity (or in this case, the underlying contract outcome) downstream, unless it is being used to manipulate the prices on markets that the CFTC regulates.”
A casino game that uses a CFTC contract’s outcome as a randomization engine doesn’t do any of that. The CPI contract resolves normally on the exchange and the casino game is a separate, downstream use of that outcome. Nothing feeds back into exchange prices. “If what they are using the CFTC contract for is something else which doesn’t impact the CFTC’s markets, then I don’t see what the jurisdictional hook is.”
So the CFTC can likely block these products at the exchange level, but may have no reach over a product built one step removed from its markets. But that doesn’t mean enforcement is impossible.
“Even if it doesn’t fit neatly within the CFTC regulatory scope, there’s still a way that they, by partnering with the DOJ, can take action here and assert themselves,” Piepgrass said.
States arguably have the clearest authority over the product itself, but patchwork state enforcement has taken years to catch up in previous gray-zone markets, and the ongoing preemption battle over prediction markets has already produced circuit court splits that complicate any state’s ability to act.
Parties align on casino-based market prohibition, but gap remains
There’s a notable consensus forming around one version of casino-related prediction market concerns. The question is whether a more imminent threat is left out of that treatment.
On February 10, Rep. Dina Titus (D-NV) introduced the Fair Markets and Sports Integrity Act (H.R. 7477), the first congressional action specifically targeting casino-game contracts (and sports-related contracts) on prediction market platforms. On March 23, Senators Adam Schiff (D-CA) and John Curtis (R-UT) introduced the Prediction Markets Are Gambling Act in the Senate, enumerating the same casino games (slots, poker, blackjack, roulette, bingo) as prohibited contract categories. Both bills would amend the CEA to bar CFTC-registered entities from listing those contracts.
The prediction market industry’s own coalition agreed. In its April 30 CFTC comment, submitted the same day the comment period on the agency’s ANPRM closed, the Coalition for Prediction Markets, representing Kalshi, Coinbase, Crypto.com, Robinhood, and Underdog, asked the CFTC to formally define “gaming” as casino-style games and stated it “does not support listing contracts on traditional casino games (such as slot machines, roulette, or ‘table games’) on prediction market platforms.”
Rep. Titus publicly noted the alignment: “I am pleased to see the Coalition for Prediction Markets, which includes Kalshi, supports my rule that bans prediction markets from providing casino style games.”
I am pleased to see the Coalition for Prediction Markets, which includes @Kalshi, supports my rule that bans prediction markets from providing casino style games. I was the first in Congress to introduce legislation, H.R. 7477, on February 10, specifically targeting these types…
— Dina Titus (@repdinatitus) April 30, 2026
The consensus addresses one perceived casino-related threat, but the model being explored targets a different loophole that the current legislation isn’t designed to close.
The state enforcement picture
One of the most aggressive states in terms of cracking down on gray area or unregulated gambling is Pennsylvania, which has directed action on multiple fronts including sweepstakes casinos, skill games, and now sports event contracts. Doug Harbach, the PGCB’s director of communications, framed the board’s position as follows: “The Pennsylvania Gaming Control Board believes that the Commodity Exchange Act was never meant to authorize gaming, be it sports wagering or casino games.”
The CEA, Harbach told DeFi Rate, was built for legitimate commercial hedging, noting its oversight in both chambers sits with the Agriculture Committees, “which is consistent with how Congress intended the CEA and the CFTC to function…to establish a marketplace where someone (e.g. a farmer) could hedge his risk of bad weather (e.g. a drought) by buying a futures contract that there would be less than average rainfall, thereby compensating him for damage to his crops. In other words, prediction markets were established to hedge risk against economic consequences of events outside of the control of the purchaser of the contract, not to give an 18-year-old the opportunity to have a small windfall if his favorite team won a game or from the outcome of the spin of a roulette wheel.
The PGCB has been in conversations with the Pennsylvania AG’s office about legal options, Harbach said, but acknowledged the constraints.
“It is worth noting that the 3rd Circuit Court of Appeals (the U.S. Circuit in which Pennsylvania is situated) recently decided that state gaming laws are likely pre-empted by the CEA. That decision, which may very well be appealed to the U.S. Supreme Court, must be considered when discussing any potential litigation. The clearest and quickest path to addressing this issue is through the CFTC rulemaking process or through Congressional action to more clearly outlining the boundaries of the CEA. That is why the Board continues to discuss this matter on the Federal level.”
Notably, when asked specifically about the casino-engine model (prediction market contracts powering casino-style games rather than being listed directly as casino game contracts), Harbach acknowledged he wasn’t versed in that specific structure. Pennsylvania has dealt directly with sweepstakes casinos and skill games, but this next iteration isn’t yet on the board’s radar. That’s not surprising considering regulators are focused on the loopholes already being debated and addressed, not on a hypothetical one quietly being built in the background.
The jurisdictional confusion isn’t new; it’s baked into how prediction markets developed. Novig CEO Jacob Fortinsky recalled on a recent Prediction Market Movers podcast that when attempting to get their peer-to-peer sports betting exchange licensed back in 2023, a state regulator told him early on: “We essentially don’t view what you’re doing to be gambling. If you’re trying to build a financial exchange for sports betting, you ought to go to the federal government.” State regulators directed operators toward the federal framework. The model now being explored may sit in the space between: too far from the exchange for the CFTC to reach, and too wrapped in federal derivatives for states to easily act.
Closing the wrong door?
Even if the Curtis-Schiff or Titus bills pass or if the CFTC formally defines “gaming” as casino-style games in its rulemaking, it may not foreclose the model Piepgrass says operators are already exploring. Current efforts target casino-game contracts on registered exchanges, but the novel model doesn’t require a registered exchange.
The potential prediction market-powered casino game model would enter that gap with a stronger legal argument than any of its gray-zone predecessors. The underlying instrument isn’t a promotional contest or a skill game, but rather a federally regulated financial derivative. That doesn’t make it legal, but it may position it in jurisdictional no-man’s land that neither the congressional proposals nor the CFTC’s rulemaking is designed to address.
The conversation about building exactly that is already happening. The window may be narrower than in past gray-zone online casino models, but operators are already beginning to look through it.
