Dan Patrick eyes closing “gambling loophole” for prediction markets. The feds stand in Texas’ way.

A Trump administration agency has sued other states that sought to regulate Kalshi, Polymarket and other prediction operations under their gambling laws.

In March, Lt. Gov. Dan Patrick directed state senators to explore ways to close “gambling loopholes” that allow online prediction markets to operate in Texas, raising concerns that state elections and sporting events could be manipulated for profit.

Patrick’s directive was the first time a state leader officially acknowledged the existence of rapidly growing prediction markets, which let users wager on outcomes tied to anything from the weather to election winners and sports scores.

Most prediction markets didn’t operate in the U.S. before 2025.

Any attempts by the Texas Legislature to restrict prediction operators, however, would run into federal roadblocks as the Trump administration insists that oversight belongs to a U.S. agency, not the states.

The Commodity Futures Trading Commission has taken vigorous steps to retain exclusive regulatory oversight, suing to block five states from taking legal action against predictive markets, including a lawsuit filed Tuesday against Wisconsin.

Prediction market operators argue that state gambling laws don’t apply to them because users aren’t placing bets, they’re risking money on predictions — no different than other exchange-traded financial contracts that speculate on the future performance of commodities. Congress created the CFTC in 1974 to regulate futures trading.

Sara Slane, head of corporate development for Kalshi, the country’s largest prediction market, said she believes federal regulators provide adequate oversight, a perspective Kalshi is “never shy” about sharing with state officials.

“We are regulated at the federal level, but of course, given now the popularity of prediction markets, we are doing a lot of educating on the state level,” Slane said. “That’s the dialogue that we’ll envision having, certainly, in the state of Texas.”

Amid fears of insider trading and market manipulation, other states have struggled to regulate prediction markets under their current gambling laws, including 15 states that have sued, investigated or sent cease and desist orders to operators for allegedly violating gambling restrictions or failing to acquire gambling licenses.

Texas, however, has been slower to react, uncharacteristic for a state that has stood firm against efforts to expand online wagering.

The National Association of Attorneys General and the Ohio attorney general’s office asked Texas in March to join a legal brief arguing that the CFTC does not have sole authority to regulate the markets, emails obtained by The Texas Tribune show. Although 39 states signed on, Texas Attorney General Ken Paxton’s office didn’t respond.

The same thing happened last week when the two organizations again asked Texas to support a similar brief joined by 37 states.

In August 2025, Paxton was one of four state attorneys general who did not sign a letter urging then-U.S. Attorney General Pam Bondi to crack down on offshore gambling.

Paxton’s office did not respond to requests for comment on whether state gambling laws applied to prediction markets and why Texas did not join the two briefs or the letter to Bondi. When the Tribune asked to view internal communications related to prediction markets, the office declined, saying the information was protected by attorney-client privilege. The Ohio attorney general’s office and the national group declined to comment.

Opponents of legalized gambling say prediction markets, despite being portrayed as a form of futures trading, are simply a new form of gaming, producing the same problems as other types of wagering, including addiction, financial ruin and family strain.

“This is public health. It rewires the brain, it requires increasing amounts of dopamine, people will bet more and more and more,” said Russ Coleman, board chair for Texans Against Gambling. “The number of suicides that will result, the number of families that will be broken up, the number of embezzlement cases — it will hit.”

Jonathan Covey, director of policy for Texas Values, a conservative advocacy group, said the markets have the potential for additional harm because many facilitate wagering on elections.

“Elections, they’re not just economic activity, they’re core functions of our state sovereignty,” Covey said. “We have Penal Code chapter 47 that says election betting is illegal, and prediction markets have been trying to sort of relabel that activity.”

Last week, Kalshi revealed that it had fined three congressional candidates, including one in Texas, for attempting to wager on their own elections. That revelation — and the recent arrest of a U.S. Army soldier accused of using classified information for an almost $410,000 payday on another platform — has added fuel to opponents’ concerns that the current regulatory framework is unprepared to address potential manipulation.

Betting on federal oversight

Prediction markets operate by offering “event contracts” tied to different outcomes, such as the number of strikeouts in an Astros’ ballgame or the winner of the Texas attorney general Republican runoff. Sports-related contracts represent 80% to 90% of Kalshi’s monthly trading volume, according to investment research platform Artemis.

There are very few explicit federal restrictions on futures trading beyond motion picture box office receipts and, thanks to the Onion Futures Act of 1958, the price of onions. A CFTC advisory in March also clarified that contracts related to war, assassination or terrorism are not allowed.

Polymarket, which bills itself as the world’s largest prediction market, has offered contracts based on the wars in Iran and Ukraine, but those are hosted on a platform outside of the U.S. and are not subject to CFTC regulation. Polymarket also maintains a U.S. product under CFTC regulation.

The CFTC permits prediction market operators to self-regulate their contracts, a structure Chair Michael Selig described as the government granting them “quasi-regulatory authority.” The CFTC, he told a U.S. House hearing mid-April, can review and reject contracts, acting as the “second line of defense” after the operators themselves.

“The Commodity Exchange Act sets forth a regulatory scheme where the exchanges are the first line of defense,” Selig said.

That self-governing was displayed last week when Kalshi announced enforcement action against the congressional candidates who bet on their own races, including Zeke Enriquez, who finished 11th in the 21st Congressional District Republican primary. Kalshi fined Enriquez $784 and banned him from using the exchange for five years for buying less than $100 worth of event contracts in the GOP primary.

The CFTC also solicited public comments from mid-March through Thursday for input on future rules specifically addressing prediction markets. On Thursday, the National Conference of State Legislatures, which represents state lawmakers including those in Texas, submitted a comment urging the CFTC to place event contracts related to sports under state gambling laws.

In Texas, Patrick opened the door to potential regulation in March when he directed the State Affairs Committee to study how federal law has been exploited to “circumvent Texas gambling prohibitions.” As presiding officer of the Texas Senate, he has long opposed efforts to loosen state gambling restrictions.

Patrick also told senators to prepare recommendations for the 2027 session of the Legislature to ensure prediction markets do not endanger the integrity of elections and sports in Texas.

The committee has no meetings currently scheduled.

Coleman said Patrick’s directive was a “happy surprise” as his organization works to raise awareness of the rapidly expanding prediction markets. While uncertain what effect it will have, he hoped it indicated Patrick’s continued opposition to gambling writ large.

“Maybe it was stretching a little bit to read too much into that, but it says that he’s paying attention,” Coleman said.

The CFTC’s efforts to discourage states from regulating prediction markets started after Selig, appointed by President Donald Trump, began in December as the only commissioner at the agency, which is designed to be led by five presidential appointees. Selig and the CFTC did not respond to multiple requests for comment.

Covey said Selig’s treatment of prediction markets was “concerning” because states have traditionally had the power to determine what kinds of gambling are permitted within their borders.

“The CFTC is treating these as financial documents, but the states are the ones that have always regulated gambling,” Covey said. “When a federal agency pushes to expand these markets nationwide, it risks overriding state authority and exposing consumers to something that many states would otherwise restrict.”

Covey said operators, relying on federal oversight, have set up shop in states without formal notification, leaving political leaders playing catch-up.

“I think that this issue has not been highlighted, and a lot of people are not aware of it,” Covey said.

In Republican-led Texas, efforts to regulate prediction markets may be complicated by many state officials’ close ties to Trump. Truth Social, the social media platform created by the president, announced in October it would launch its own prediction market platform. Donald Trump Jr. is an adviser for Kalshi and Polymarket.

“There’s a lot of political overtones to this,” Coleman said.

As courts, Congress weigh in, sportsbooks enter the picture

People on both sides of the issue expect questions about state vs. federal regulation to be decided by the U.S. Supreme Court. Three federal appeals courts are reviewing disputes between prediction market operators and states, with oral arguments completed in two cases and a third set for next week — although no cases are pending before the 5th U.S. Circuit Court of Appeals, which oversees Texas.

“This is so, so far down the road that I can truly understand why state lawmakers are saying, ‘OK, great, Dan Patrick, it’s on the interim charge, thank you, we’ll keep our eye on this,’ but at this point it’s got to play out in the courts,” Coleman said.

Several bills have been introduced in Congress to restrict who can use prediction markets and prohibit contracts related to sports or war, including one sponsored by Rep. Greg Casar, D-Austin. On Thursday, the U.S. Senate unanimously passed a resolution banning senators from using prediction markets. Sen. Bernie Moreno, R-Ohio, said on the Senate floor that the ban also applied to Senate staff.

Meanwhile, prediction markets have provided sportsbooks access to residents of states like Texas where online gambling is generally forbidden.

Two of the largest online sportsbooks, FanDuel and DraftKings, have launched prediction market products offering sports contracts that accept money from Texans. Gaming advocates had worked, unsuccessfully, to persuade Texas lawmakers to legalize daily fantasy sports in 2017 and online sports betting in 2023 and 2025. Today, opening DraftKings’ sports betting app in Texas automatically pivots players to its prediction market.

DraftKings says there is “clear consumer interest” in Texas.

“Drawing on more than a decade of experience serving sports fans, and informed by ongoing, thoughtful dialogue with regulators and policymakers, DraftKings has developed a platform designed to enhance the fan experience while making available responsible engagement tools and resources,” a statement from a DraftKings spokesperson read.

FanDuel responded to questions about their prediction markets by pointing to interviews with other outlets, including a CNN interview with company President Christian Genetski, who described the markets as a “reasonable facsimile” to sportsbooks.

What could Texas do?

Carol Ann Maner, chair of the Texas Coalition on Problem Gambling, a nonpartisan organization focused on bolstering resources to combat gambling addiction, said the exponential growth of prediction markets is a great concern from a public health perspective.

The coalition has not identified examples of problem gambling stemming from prediction markets, but Maner said the similarities between them and sportsbooks means the risks are no different.

“It would be almost like malpractice on our part to pretend not to know that this would be harmful,” she said.

Gambling opponents say Texas lawmakers still have several opportunities to regulate or investigate prediction markets without crossing the CFTC.

Covey suggested scrutinizing advertising that is often indistinguishable from sportsbook operations and can target younger audiences. Federal regulations allow prediction markets to be used by those 18 and older, while most states restrict gambling to those 21 and up.

“Their advertising really is a pretty significant insight into where they feel like they’re pulling their customer base from,” Covey said.

Kalshi and Polymarket previously ran Instagram ads in Texas that explicitly called their services “betting,” the Tribune found in September. Ads using direct gambling terminology were removed after Event Horizon and the Tribune reported on their proliferation, but new ads still frame the markets as a more profitable alternative to sportsbooks.

Legislators could also request or subpoena information from operators to glean details on how Texans use prediction markets. The Senate State Affairs Committee used that tool last year when it scrutinized lottery couriers, learning that 99.9% of the largest courier’s sales in 2024 were done online, which Patrick and other lawmakers said violated state law.

Another idea is banning state officials and employees from participating in prediction markets if they have insider information. Four state governors have issued executive orders barring state employees from using nonpublic information to influence contracts purchased on prediction markets. The orders do not outright ban employees from using the markets.

Slane said she understands why state leaders may be apprehensive about giving up oversight but is confident Kalshi is on “firm legal ground” being regulated exclusively by the feds.

“It’s not a fight that we want to be in, but we’re not surprised that we are in it,” Slane said. “I think when people sort of take a step back, certainly from a state level, and they’re simply viewing this as a federal preemption issue over states’ rights, your natural intuition is to be the defender of your state rights.”

Source: Ayden Runnels, The Texas Tribune

Photo Credit: A mobile device displays the Kalshi logo while a laptop displays the webpage of the prediction market platform in Copenhagen, Denmark, on Feb. 10, 2026. Kristian Tuxen Ladegaard Berg/NurPhoto via REUTERS

The Texas Tribune is a nonprofit, nonpartisan media organization that informs Texans — and engages with them — about public policy, politics, government and statewide issues.

Dan Patrick eyes closing “gambling loophole” for prediction markets. The feds stand in Texas’ way.

Kay Robin Norwood

Graduating ETAMU senior balances football, research and leadership in psychology

Related Articles

Leave a Comment