Prediction markets allow participants to trade contracts based on the outcomes of real-world events. These contracts can cover everything from elections and economic data to sporting events or entertainment awards. At one level, they resemble gambling because they involve a wager on whether something will happen. At another level, they operate as financial derivatives, with binary contracts that settle on a measurable event and are priced by supply and demand in an exchange model. This dual nature makes prediction markets legally complex. In Canada, they run into overlapping gambling and securities regimes that severely restrict their operation. By contrast, the U.S. has begun to recognize prediction markets as a legitimate part of the derivatives sector, with the Commodity Futures Trading Commission (“CFTC”) licensing certain exchanges. This insight explores how prediction markets are classified in Canada, the legal pathways available, and how these differ from the evolving U.S. approach.

Overview of Prediction Markets

Prediction markets operate through yes-or-no event contracts that pay out a fixed amount (typically one dollar) if the event occurs, and nothing if it does not. Accordingly, the price of the contract reflects the probability of the event to occur according to the collective judgement of participants. To illustrate, if a contract on “inflation above three percent in 2025” trades at sixty-five cents, the market is implying that there is a sixty-five percent chance of that outcome.

This model differs from traditional sports betting. Sportsbooks set odds and bettors wager against the house, whereas prediction markets are typically structured as exchanges in which participants trade contracts with one another, and prices adjust dynamically. This exchange model creates informational value, as prediction markets can serve not just as entertainment, but also as forecasting and even risk management tools. Examples of these markets include Kalshi, a U.S. CFTC-regulated event contracts exchange; PredictIt, an academic project focused on small-stakes political markets; Polymarket, a crypto-based global platform; and the recently announced FanDuel–CME venture,[1] which will bring event contracts to U.S. retail users.

Canadian Legal Landscape

Gambling Law

In Canada, gambling is prohibited under the Criminal Code except in limited circumstances. As a general rule, wagering on uncertain events—whether through bookmaking, pool-selling, or similar schemes—is unlawful. The primary exception to this rule is that provinces are permitted to conduct and manage “lottery schemes”,[2] a term that has been interpreted broadly to include casinos, sports betting, and other forms of wagering. For prediction markets, this means that if they are classified as gambling, they may only be offered under the authority of a provincial Crown corporation or a licensed operator acting within a provincial regime. Therefore, any private company attempting to run an independent prediction market would fall outside these exceptions and be considered an illegal lottery.

Securities Law

Canadian regulators have also taken the position that many event contracts are derivatives, particularly in the form of binary options. Binary options are contracts that pay a fixed amount if a condition is met, and nothing otherwise. As such, they are structurally identical to most prediction market contracts. Since 2017, the Canadian Securities Administrators (“CSA”) and provincial regulators have prohibited the advertising, offering, sale, or trading of short-term binary options to retail investors through a combination of CSA policy and coordinated provincial instruments and blanket orders.[3] The ban was motivated by widespread fraud in the retail binary options industry, and to date no Canadian firm has been licensed to offer such products. Consequently, even if a prediction market were framed as a derivatives platform rather than a gambling product, it would still be prohibited from being promoted, marketed, or sold to retail investors under securities law.

Provincial Lawful Pathways

Despite the federal restrictions, provinces exercise broad authority to design and regulate gambling products within their jurisdictions. Ontario has been the most active in this space. Under its iGaming regime, the Alcohol and Gaming Commission of Ontario (“AGCO”) allows licensed operators to offer novelty bets on non-sporting events, provided the outcomes are verifiable, appropriate safeguards exist to ensure integrity, and wagers are not offensive.[4] In 2025, Ontario-licensed sportsbooks explored offering wagers on certain political events,[5] though any such listings remain subject to evolving AGCO policy and approval. Other provinces remain more cautious, generally limiting Crown corporation offerings to sports betting and a small number of special wagers. While provinces have begun to cautiously open the door to prediction markets through these novel frameworks, the CSA has maintained a prohibitive stance. Although the CSA operates a sandbox for innovative financial products, it has not extended exemptive relief to prediction market platforms, and unauthorized launches have prompted swift enforcement.

Guidance for Canadian Operators

For prospective operators, there is currently no independent pathway to legally establish a prediction market in Canada. The only viable avenues are to partner with a provincial lottery corporation, obtain a provincial iGaming license and frame the product as a novelty bet, or in rare cases seek exemptive relief through the CSA sandbox. In practice, this would also require registration or exemptive relief for the platform and any intermediaries, a prospect highly unlikely to be granted for retail users under the CSA’s current posture. Attempting to operate outside these structures exposes operators to dual risks: criminal liability under the Criminal Code and securities enforcement by provincial regulators.

Comparative Perspective: U.S. Regulation

CFTC Oversight

In the U.S., event contracts are treated as commodities or derivatives under the Commodity Exchange Act, placing them under the jurisdiction of the CFTC rather than state gambling regulators. This federal framework allows prediction markets to be structured as legitimate financial products, provided they are offered through a licensed exchange. The CFTC has actively policed unregulated operators, shutting down offshore platforms such as InTrade, penalizing Polymarket, and revoking the no-action relief previously granted to PredictIt. At the same time, it has created a clear path to legality through the Designated Contract Market (“DCM”) system.

Designated Contract Markets

A DCM is, in effect, a federally licensed futures exchange authorized to list and clear derivatives contracts, including event-based products. To obtain this designation, an applicant must file a comprehensive application with the CFTC and demonstrate compliance with twenty-three “core principles” set out in the Commodity Exchange Act.[6] These principles address a wide range of regulatory concerns, including the maintenance of fair and orderly markets, protections against abusive or manipulative trading practices, transparent rules and governance, adequate financial resources, effective risk management and clearing arrangements, and robust anti-money-laundering and know-your-customer procedures. Applicants must also provide extensive documentation of their trading systems, surveillance mechanisms, and cybersecurity safeguards, and the CFTC will conduct background checks of principals and key officers. The process is resource-intensive and often involves prolonged dialogue with the CFTC, but once designation is granted, the exchange is empowered to operate nationwide, listing contracts that are exempt from state-level gambling prohibitions by virtue of their status as federally regulated derivatives.

Kalshi Case Study

Among the few exchanges to navigate this demanding process is Kalshi, which in 2020 became the first event contracts platform to secure CFTC designation. Kalshi offers contracts on a wide range of outcomes, including inflation, GDP growth, hurricanes, and entertainment awards. It enforces strict listing standards to ensure contracts are objectively verifiable and not susceptible to manipulation. However, despite these standards, political prediction markets remain a flashpoint. In 2023, the CFTC blocked Kalshi from listing congressional control futures, arguing they fell within a statutory prohibition on gaming.[7] In 2024, a federal court disagreed, finding that election contracts were not gaming under the Commodity Exchange Act. While the CFTC initially appealed the decision, it later withdrew, leaving the ruling in place and allowing Kalshi to proceed with certain election contracts. Nonetheless, the CFTC retains authority to review and object to individual contract listings under the Commodity Exchange Act.

Recent Developments

In August 2025, CME Group and FanDuel announced a joint venture to launch CFTC-approved event contracts for retail users. CME will provide the exchange infrastructure while FanDuel serves as the consumer-facing platform.[8] The venture plans to offer contracts tied to economic indicators and commodity benchmarks, framed as regulated financial products rather than wagers. This approach is designed to avoid state gambling restrictions and broaden access nationwide, though it remains subject to CFTC approval. The partnership marks the first significant crossover between a major sportsbook and a global derivatives exchange, though it remains contingent on CFTC approval. To this end, Nevada regulators have already cautioned FanDuel’s parent company against introducing sports-based prediction contracts without state approval.[9]

At the same time, DraftKings has taken initial regulatory steps toward a similar direction. In August 2025, the company filed with the National Futures Association under the name Gus III Holdings LLC, seeking registration as both a swap firm and an introducing broker.[10] While not yet a full exchange application, the filing suggests DraftKings is exploring a pathway into federally regulated prediction markets, subject to approval and oversight.

Together, these moves highlight growing momentum among major betting operators to enter prediction markets through financial regulation, positioning them as a potential new frontier in the U.S. gaming and trading industries.

Conclusion

In Canada, the legal framework governing prediction markets remains highly restrictive. Federal gambling prohibitions under the Criminal Code, combined with the CSA’s ban on binary options, leave little room for independent platforms to operate. The result is a regulatory environment in which provinces, most notably Ontario, may authorize limited novelty wagers through their own gaming regimes, but no broader system exists to accommodate prediction markets as either financial instruments or forecasting mechanisms.

By comparison, the U.S. has adopted a more structured approach. The CFTC has established a pathway for event contracts through the DCM framework, enabling exchanges such as Kalshi, and more recently initiatives involving FanDuel, CME, and DraftKings, to integrate prediction markets within the regulated financial system. In contrast, Canadian innovation remains confined to provincial gambling structures, preventing prediction markets from developing beyond a limited entertainment function.

The central challenge for Canada is whether to continue treating prediction markets exclusively as gambling or to consider a regulatory framework that acknowledges their broader informational and financial value. Without reform, Canada risks being left on the sidelines as prediction markets evolve into a mainstream financial product.

If you have questions about this article or Gaming & Betting law, we would love to hear from you. Feel free to reach out to us at 1-800-604-1312 or https://segevllp.com/contact-us/.

Disclaimer

***The above post is provided for informational purposes only and has not been tailored to your specific circumstances. This post does not constitute legal advice or other professional advice and may not be relied upon as such.***

Links:

[1] https://www.cmegroup.com/media-room/press-releases/2025/8/20/cme_group_and_fanduelpartnertodevelopinnovativeeventcontractspla.html

[2] https://laws-lois.justice.gc.ca/eng/acts/c-46/page-33.html#docCont

[3] https://www.osc.ca/en/securities-law/instruments-rules-policies/9/91-102/multilateral-instrument-91-102-prohibition-binary-options

[4] https://www.agco.ca/en/responsibilities-and-resources/sport-and-event-betting-integrity

[5] https://www.casino.org/news/ontario-sportsbooks-get-in-on-political-betting-action/

[6] https://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm

[7] https://www.dentons.com/en/insights/alerts/2024/october/1/kalshi-v-cftc-effect-on-the-cftcs-rulemaking-and-a-new-era-for-event-contracts

[8] https://www.cmegroup.com/media-room/press-releases/2025/8/20/cme_group_and_fanduelpartnertodevelopinnovativeeventcontractspla.html

[9] https://sigma.world/news/fanduel-prediction-markets-nevada-regulators/

[10] https://sbcamericas.com/2025/08/20/draftkings-pp-ud-nfa/