Small Businesses Turn to Prediction Markets for Risk Hedging as States Move to Ban the Platforms

A Northern California goat herder paid $50,000 this spring for a contract on the federally regulated exchange Kalshi that will pay $500,000 if California does not extend a wage exemption for agricultural workers by October 1. The exemption expired June 30, threatening to more than triple Tim Arrowsmith’s labor costs. No insurer offered coverage for the regulatory risk, and no futures contract existed. The Kalshi contract, structured as an event derivative, effectively transfers that risk to counterparties willing to price it.

The transaction illustrates a rapid expansion of prediction markets beyond political forecasting into commercial risk management. Event contracts — derivatives that pay based on real-world outcomes such as election results, economic data, or regulatory decisions — have operated under the Commodity Exchange Act for years. The Act treats any measurable risk as a valid underlier for a federally regulated derivative. Kalshi, designated as a contract market by the Commodity Futures Trading Commission, lists contracts on outcomes ranging from Federal Reserve rate moves to Tesla delivery numbers.

That growth has triggered a coordinated state-level response. More than a dozen states, often backed by casino and sports-betting interests, have moved to restrict or ban prediction markets, arguing they constitute illegal gambling. New York, New Jersey, and Nevada have issued cease-and-desist orders or filed lawsuits against Kalshi and rival platforms. The states apply gaming statutes written for house-banked wagering to exchange-traded contracts where the platform acts as an intermediary, does not set odds, and does not take the opposite side of trades.

Federal regulators and market advocates contend the state actions threaten to fragment national derivatives markets. The CEA establishes a uniform federal framework for derivatives precisely to prevent a patchwork of state rules that would make national price discovery impossible. A former CFTC commissioner, writing in Fortune, compared the state bans to a governor blocking residents from buying Tesla shares because of personal objections to Elon Musk, or restricting NYSE trading to in-state counterparties only.

The economic stakes extend beyond hedging. A Federal Reserve research paper published this year found that Kalshi’s event contracts provide real-time probability assessments that outperformed Fed funds futures in predicting interest-rate decisions. The markets aggregate dispersed information and incentivize accuracy, unlike social media or punditry, which optimize for attention. Environmental funds now use the contracts to hedge California carbon allowance prices; seasonal businesses hedge weather-related revenue swings.

Kalshi and the CFTC have challenged state enforcement actions in court, arguing federal preemption under the CEA. The outcome will determine whether prediction markets remain a nationally integrated risk-transfer mechanism or become a collection of state-limited betting products. For Arrowsmith, the October 1 deadline will settle his contract — and test whether a goat herder’s hedge survives the regulatory fight.