The federal-state arbitrage that nobody planned for
The first time I saw a UFC main event listed on Kalshi as a binary event contract — yes/no on whether the favourite wins, priced in cents like a financial derivative — I knew the California market was about to get strange. Strange not because the product itself was novel. Binary betting markets have existed in some form since the early 2000s. Strange because the regulatory rail underneath it was completely different from anything California gambling law had ever encountered. A licensed sportsbook is regulated by state gaming authorities under the police powers of the state. A Kalshi UFC contract is regulated by the Commodity Futures Trading Commission under federal commodities law. Same outcome bet on, two completely different sets of regulators, and only one of them needs California’s permission to operate.
That structural arbitrage — federal regulation overriding state gambling prohibition — is the real story of how prediction markets reshaped the California UFC wagering picture in 2024–2026. It is not a technology story. It is a jurisdictional story. And the regulated US sportsbook industry, led by the American Gaming Association, has been pushing back hard precisely because they understand that if the federal carve-out holds, the state-by-state sports betting model that has dominated since 2018 is structurally threatened.
This piece is about how prediction markets actually work as a UFC wagering channel, why California’s existing law has no purchase on them, and what the AGA-led pushback is trying to accomplish.
How event contracts actually function
A Kalshi event contract on a UFC fight is, in structural terms, a futures contract on a binary outcome. The contract pays $1 if the specified outcome occurs and $0 if it does not. You buy a yes-side contract for some price between $0.01 and $0.99, and you sell a no-side contract at the complementary price. If you pay $0.62 for a “Khamzat wins” contract and Khamzat wins, you collect $1 — a return of about 61%. If he loses, the contract settles at $0 and your $0.62 is gone.
The pricing translates directly to implied probability without any of the American-odds gymnastics. A contract trading at $0.62 implies a 62% probability of the outcome occurring. A contract at $0.35 implies 35%. The yes and no sides sum to roughly $1.00, with a small spread between bid and ask that represents the market-maker’s margin — analogous to but typically tighter than the hold on a sportsbook moneyline.
The crucial distinction from a sportsbook is that you are not betting against the house. You are buying a contract from another counterparty on the exchange, who is selling it because they hold the opposite view (or because they are a market-maker providing liquidity). Kalshi runs the exchange, takes a small fee on transactions, but does not have a directional position in the outcome. That structural difference is what supports the CFTC’s classification of these as derivative contracts rather than gambling products. The legal logic is that a derivative is a contract between counterparties, not a bet against a bookmaker.
Polymarket operates similarly but on blockchain rails, using USDC as the settlement currency, and was historically not directly accessible to US residents until late 2024 when its legal posture shifted. The mechanics of the contracts are functionally identical to Kalshi’s, but the regulatory positioning differs in details that matter for California specifically.
The California blind spot
Here is where the structure produces an outcome California law was not built to handle. California Penal Code section 337a prohibits “betting” on sporting events. The legal definition of betting is consistent — risking something of value on the outcome of a contest. By that test, buying a Kalshi UFC yes-contract is functionally betting on a UFC outcome. Indistinguishable from a sportsbook moneyline in terms of what the customer is risking, what they are predicting, and what they stand to gain.
But California’s enforcement authority over Kalshi is limited because Kalshi is operating under federal CFTC oversight as a Designated Contract Market. The CFTC’s authority preempts state regulation of derivative markets. California can argue, and has argued through the Attorney General’s office, that UFC event contracts are not derivatives in any meaningful financial sense — they are gambling products dressed in financial clothing. The CFTC has not agreed. Until that disagreement resolves through litigation or federal regulatory action, Kalshi’s UFC contracts remain accessible to California residents who can open Kalshi accounts and trade UFC outcomes from inside the state.
That is what I mean by “California blind spot.” The state has the substantive view that these are bets and that section 337a applies. The state lacks the procedural authority to enforce that view against a federally-regulated DCM. The gap is regulatory architecture, not policy preference. And for as long as the architecture holds, prediction markets function as an unregulated-from-California’s-perspective UFC wagering channel for any state resident with internet access and a Kalshi account.
The same dynamic applies, with different details, to Polymarket. Polymarket settled with the CFTC in 2022 and operated for several years primarily outside the US market. Its 2024-onward positioning has involved a more complicated relationship with US regulators and a less direct path to California users, but the structural point is the same — its UFC markets are not bound by California state gambling law in any way the state can immediately enforce.
The growth numbers — and what they mean
The scale at which prediction markets captured sports-event wagering in 2025 is the data point that elevated the regulatory pushback from rhetoric to active policy fight. The trading volume on the Super Bowl LX market across Kalshi and Polymarket exceeded $1.6 billion. That is a single-event volume number that competes with regulated sportsbook handle for the same event. Not a fringe product anymore — a parallel infrastructure.
The advertising data tells the same story from a different angle. In 2025, Kalshi became the third-largest sports-betting digital advertiser in the United States by impressions, generating 5.2 billion digital impressions and overtaking FanDuel’s 2.9 billion. A platform that did not exist as a sports-event product five years earlier outspent the largest US regulated sportsbook in digital ad inventory. The customer acquisition was not subtle. It was the dominant force in sports-event advertising for a year.
What those numbers mean for California specifically is two-fold. First, California residents are a significant share of the user base — California is the largest US state market by population and one of the most active states for sports-event speculation generally. Second, the visibility of prediction market advertising in California has been intense, with no state-level constraint on volume or content. The ads function as continuous market education, normalising the prediction-market channel as a sports-event wagering option.
For the broader legal context that prediction markets are operating against — California’s penal code framework, the AB 831 sweepstakes ban, the Bonta DFS opinion, and the rest of the state’s 2026 gambling law landscape — see my analysis of California sports betting law in 2026.
The AGA-led pushback
The American Gaming Association’s resistance to the prediction-markets-as-derivatives framing has been the most coherent industry pushback in US sports betting in years. Bill Miller, the AGA president and chief executive, has been on the record repeatedly with the core argument. Calling it a “contract” or “derivative” does not change the substance of the activity. It might sound like finance, but in practice it is sports betting under another name.
That formulation has appeared in op-eds, Congressional testimony, and industry conference remarks across 2025.
The pushback escalated dramatically in October 2025 when the National Hockey League announced partnerships with Kalshi and Polymarket. Miller’s response was unusually direct for a trade association leader. Today’s announcement of the NHL’s partnership with Kalshi and Polymarket — prediction market platforms that now offer sports contracts to consumers in all 50 states — is deeply troubling. These companies operate entirely outside the legal sports betting framework established by states, tribal governments and federal law.
The NHL partnership crystallised what the AGA had been warning about for two years — leagues themselves were now legitimising the prediction-market channel.
The substantive AGA arguments are three. First, that sports-event contracts are functionally gambling regardless of how they are legally classified, and that the regulatory regime for them should reflect substance rather than form. Second, that state and tribal gaming authorities have built the consumer-protection infrastructure — responsible gambling tools, integrity monitoring, age verification, problem-gambling funding — that prediction markets do not contribute to. Third, that the federal CFTC framework was designed for commodity derivatives, not for sports outcomes, and the extension is a category error.
The counter-arguments from the prediction-markets side are also coherent. They argue that event contracts serve a legitimate price-discovery function, that the CFTC framework provides genuine oversight, that consumer protections on regulated DCMs are not absent — just different from state gaming protections — and that the state-by-state model is structurally inefficient and inconsistent. Both sides have substance.
The tax leakage and the harder fight
The economic argument that has gotten less press than the regulatory argument is, in some ways, the more consequential one for states like California. According to AGA tracking, prediction markets with sports-event contracts deprived US states of approximately $800 million in potential tax revenue since the start of 2025. That is not a marginal number. That is meaningful state-budget territory.
The mechanic is straightforward. A California resident who would, in a hypothetical legalised state-regulated market, bet on a UFC fight through a state-licensed book would generate tax revenue for California in the form of operator excise taxes (typically 10–20% of gross gaming revenue depending on the state) and corporate income taxes on the operator’s net revenue. A California resident who bets the same dollar on Kalshi generates federal-level fee revenue to the CFTC and the exchange, with no proportional share flowing to California state coffers. The economic transaction happens; the tax base does not.
Multiplied across the millions of US residents using prediction markets for sports outcomes, the foregone state tax revenue is real and growing. Whether you frame that as “states being deprived of revenue they would otherwise receive” or as “consumers exercising a federal-law right to use a federally-regulated product” depends on your priors. Both framings describe the same dollar flow. The political fight over which framing wins is, ultimately, the fight that determines whether prediction markets continue to grow as a UFC wagering channel for California residents through 2026 and beyond.
