Red and blue states are mounting an unprecedented legal challenge against prediction market platforms like Kalshi and Polymarket, claiming the platforms are disguising gambling as financial trading. Last month, 44 states signed a letter urging the federal regulator to abandon its oversight of these platforms, setting the stage for a broad regulatory showdown over who controls the multibillion-dollar industry.
Prediction markets allow users to trade contracts on the outcomes of future events—from elections to sports results to economic indicators. The Commodity Futures Trading Commission classifies these contracts as financial derivatives and claims exclusive federal jurisdiction. But states argue the contracts are simply another form of gambling and should fall under state gaming laws.
New York filed a lawsuit against Kalshi in July 2026, calling it an “illegal, unlicensed gambling operation” and seeking forfeiture of profits from state residents. Massachusetts, Michigan, Nevada, and Washington have all won court orders restricting Kalshi’s activities in their jurisdictions. Kentucky, Arizona, Connecticut, Illinois, and Minnesota have also sued or taken enforcement action.
The federal government is fighting back. The CFTC has sued nine states to block their enforcement efforts, arguing that federal law grants it exclusive authority over event contracts. In April 2026, the agency sued Arizona, Connecticut, and Illinois; it later extended the campaign to Kentucky, Minnesota, and other states. The CFTC contends that state gaming laws are preempted by federal commodities regulation.
Mixed Court Victories Amid Regulatory Uncertainty
Courts have issued conflicting rulings. In April 2026, Kalshi scored a win in the Third Circuit when a federal judge rejected New Jersey’s argument that prediction markets constitute gambling. But in August 2026, a federal judge in Utah ruled that state anti-gambling laws do apply to prediction markets, handing a victory to the state. The legal landscape remains unsettled, with appeals ongoing in multiple jurisdictions.
Minnesota took the most aggressive approach, becoming the first state to ban prediction markets outright in May 2026, making it a felony to operate or advertise them. The CFTC sued within days, and a federal judge blocked enforcement of the ban in July, citing federal preemption. The case is expected to be appealed.
The 44-state coalition’s July letter argued that prediction markets are a “new form of casino gambling” that should be regulated under state gaming laws, not federal commodities rules. The letter challenged the CFTC’s proposed Rule 40.11, which would expand the types of event contracts prediction platforms can offer. States contended the CFTC lacks authority over sports-related contracts and called for the agency to withdraw the rule.
The conflict reflects a broader tension between federal and state regulatory authority. States have historically controlled gambling within their borders, but the CFTC has interpreted federal commodities law to include event contracts as financial derivatives. Prediction market platforms argue their contracts are investment tools for price discovery and information aggregation, not bets.
Sources
- New York Times — reported that 44 states signed a letter in July 2026 attacking prediction market platforms and the CFTC’s regulatory approach
- CNBC — documented that 16 states are involved in legal proceedings against prediction market companies and reported the CFTC’s six lawsuits against states
- Al Jazeera — reported that at least four states (Massachusetts, Michigan, Nevada, Washington) have won court orders restricting Kalshi’s activities
- Deseret News — reported that a federal judge ruled in August 2026 that Utah’s anti-gambling law applies to prediction markets
- Forbes — reported that Kalshi won a Third Circuit case in New Jersey in April 2026, with judges rejecting the state’s gambling argument
- AP News — reported the federal government’s April 2, 2026 lawsuits against Connecticut, Arizona, and Illinois over prediction market regulation
- Sheppard Mullin — reported that the CFTC filed suit against Minnesota on May 19, 2026, marking the agency’s sixth lawsuit against a state
- NCSL — reported that more than 20 lawsuits and cease-and-desist actions are pending nationwide as of early 2026
