A widening legal battle over prediction markets is testing the limits of federal regulatory power and the traditional authority of states to police gambling. The Commodity Futures Trading Commission has taken the unusual step of suing nine states that have attempted to regulate or restrict prediction-market platforms such as Kalshi and Polymarket, arguing that federally regulated event contracts fall within the CFTC’s exclusive jurisdiction. States counter that contracts allowing customers to wager money on sports, elections and other uncertain outcomes are gambling regardless of the financial terminology used to describe them. Conflicting federal court decisions have deepened the dispute: the Third Circuit has supported federal preemption in a New Jersey case, while the Ninth Circuit has now upheld Nevada’s authority to enforce its gambling laws against Kalshi’s sports contracts. The growing split raises fundamental questions about federalism, consumer protection and whether Washington can effectively remove an activity resembling traditional wagering from state oversight simply by regulating it as a financial derivative.
Key Takeaways
- The CFTC has sued nine states to defend what it considers its exclusive federal jurisdiction over regulated prediction markets, while states maintain that sports and other event contracts constitute gambling subject to state licensing, consumer-protection and enforcement laws.
- The legal landscape is sharply divided. The Third Circuit backed Kalshi’s federal-preemption argument against New Jersey, while the Ninth Circuit concluded that Nevada may enforce state gambling laws against Kalshi’s sports-event contracts.
- The dispute increasingly appears headed toward the Supreme Court because competing appellate rulings leave unresolved whether federal commodities law can displace states’ traditional authority over gambling within their borders.
In-Depth
The fight over prediction markets has become a test of federalism, pitting the Commodity Futures Trading Commission against states that insist platforms such as Kalshi and Polymarket are running gambling operations. The CFTC maintains that event contracts traded on federally registered exchanges fall under its exclusive jurisdiction, while state officials argue that sports and other outcome-based contracts remain subject to state gambling laws.
The conflict has escalated beyond routine regulatory disagreement. The CFTC has sued nine states, including Wisconsin, Minnesota, New York and New Mexico, seeking to prevent officials from enforcing gambling restrictions against federally regulated prediction markets. New York, meanwhile, has sued Kalshi, alleging an illegal, unlicensed gambling operation and seeking penalties. The CFTC subsequently invoked emergency authority after Kalshi warned that New York’s action threatened its federally regulated market.
Courts have produced conflicting answers. The Third Circuit concluded that federal commodities law likely preempts New Jersey’s attempt to regulate Kalshi’s sports contracts. But courts elsewhere have sided with states. Most significantly, the Ninth Circuit ruled that Nevada may enforce its gambling laws against Kalshi’s sports-related contracts, rejecting the argument that federal commodities regulation automatically displaces state authority.
That split makes Supreme Court review plausible. The larger question reaches beyond prediction markets: whether a federal financial regulator can transform activities treated as gambling into nationally protected financial products. States contend that such a result would weaken consumer protections, licensing systems and police powers. Prediction-market operators counter that fragmented state regulation would undermine the uniform national derivatives market Congress created.
Sources
- https://www.cftc.gov/PressRoom/PressReleases/9220-26
- https://law.justia.com/cases/federal/appellate-courts/ca3/25-1922/25-1922-2026-04-06.html
- https://law.justia.com/cases/federal/appellate-courts/ca9/25-7516/25-7516-2026-08-28.html
- https://ag.ny.gov/press-release/2026/governor-hochul-and-attorney-general-james-announce-new-york-has-sued-kalshi
- https://www.cftc.gov/PressRoom/PressReleases/9281-26
- https://www.cftc.gov/PressRoom/PressReleases/9251-26