CFTC vs. States: Inside the Fight Over Who Regulates Prediction Markets

The dispute traces back to a simple but consequential legal theory. 

Kalshi and Polymarket's US arm both operate as Commodity Futures Trading Commission (CFTC)-registered Designated Contract Markets (DCMs) that trade "event contracts" under the Commodity Exchange Act. 

As those platforms expanded from political and economic forecasting into sports, state gambling regulators saw something that looked a lot like an unlicensed sportsbook wearing a different label. The platforms, in turn, argue that federal registration places them entirely beyond the reach of state gambling laws, since Congress has given the CFTC exclusive jurisdiction over derivatives markets.

That disagreement escalated fast. 

States began issuing cease-and-desist letters and filing lawsuits; the CFTC, under Chairman Michael Selig, started suing back, not to punish the platforms, but to sue the states directly and block their enforcement actions before they could take hold.

The CFTC's litigation campaign has moved in waves:

• April 2, 2026: Arizona, Connecticut, and Illinois were all sued the same day, each case seeking a declaration that state enforcement against Kalshi and Polymarket is preempted by federal law.
• Late April 2026: Wisconsin was added within days of the state itself filing felony-level suits against Kalshi, Polymarket, Crypto.com, Robinhood, and Coinbase. New York followed around the same stretch.
• May & early June 2026: New Mexico, Minnesota, and Rhode Island joined the list.
• June 23, 2026: Kentucky became the ninth state sued, days after AG Russell Coleman announced lawsuits against Kalshi, Polymarket, and VGW. This signaled that the fight had stopped tracking any obvious partisan line, as this kind of federal action was the first taken against a Republican attorney general.

The pattern is consistent: a state moves against the platforms, and the CFTC moves against the state, typically within days to weeks.

What makes this fight harder to predict and more likely to reach the Supreme Court is that federal courts have not lined up behind a single answer.

New Jersey

The clearest win for the platforms came on April 6, 2026, when the Third Circuit Court of Appeals ruled 2-1 in Kalshi's favor, upholding a preliminary injunction against New Jersey. 

The majority found that sports event contracts qualify as "swaps" under the Commodity Exchange Act, giving the CFTC both field and conflict preemption over state gambling law. It was the first federal appellate ruling squarely on the merits, and it briefly looked like the industry's legal foundation was solidifying.

New York

Then, on July 7, 2026, the Southern District of New York went the other way. 

Judge Analisa Torres denied Kalshi a preliminary injunction against New York's enforcement effort, ruling that the Commodity Exchange Act does not preempt New York's gambling laws and that Kalshi hadn't shown a likely path to success on the merits. New York Governor Kathy Hochul wasted no time in publicly framing the win, and the state's AG cited the ruling as supplemental authority in the CFTC's own suit against New York, turning the federal government's argument back on it in the same case.

That standoff escalated on July 31, 2026, when Governor Kathy Hochul and Attorney General Letitia James announced that New York had sued Kalshi in state court for running an illegal gambling operation. An investigation by the Office of the Attorney General concluded that Kalshi's prediction market meets New York's legal definition of gambling, yet the company never obtained a license from the New York State Gaming Commission or paid the taxes that licensed casinos and mobile sportsbooks do.

"No matter what they call themselves, prediction markets like Kalshi are gambling platforms, plain and simple," James said. The state also argues the platform reaches users aged 18 to 20, below New York's legal gambling age of 21, and that Kalshi's unlicensed status starves public schools, youth sports programs, and problem-gambling treatment of tax revenue.

The lawsuit asks the court to stop Kalshi from operating as an unlicensed gambling business unless it obtains a New York gaming license, and to require the company to forfeit all illegal gains, pay restitution to affected users, and pay fines equal to three times its gains. 

ESPN reported the requested penalties carry a minimum estimate of $36 billion pending a full accounting.

The filing landed two days after a federal appeals judge declined to pause the lower-court ruling that New York's gambling laws can apply despite Kalshi's federal registration. The CFTC quickly asked the court to bar the state from acting, warning that letting a single state enforce its gambling laws against federally regulated markets could bring them "to the brink of destruction." 

Kalshi dismissed the suit as "political theater" and maintains that states cannot shut down a federally licensed exchange.

Nevada

Nevada's fight is following a similar arc: its case is now before the Ninth Circuit, and by most accounts the panel leaned toward the state during oral argument. A ruling for Nevada would deepen the split even further, setting up exactly the kind of unresolved conflict between circuits that tends to get the Supreme Court's attention. 

Massachusetts had already reached a similar conclusion at the trial court level in January 2026.

The most aggressive move yet came in mid-July. 

On July 14, 2026, a Michigan state court ordered Kalshi to cancel trades that had already been executed. The CFTC responded by invoking its emergency authority to block the cancellation, describing it as the first time a state had tried to directly unwind completed derivatives transactions, rather than simply block future access. 

This is an altogether different kind of confrontation from a cease-and-desist letter or a licensing dispute, as it signals that the fight now includes the mechanics of executed trades, as well as market access.

While the jurisdictional battle plays out in court, some states are pursuing a quieter strategy: rather than banning the platforms outright, they're folding prediction markets into their existing sports-wagering licensing frameworks, which can function as a de facto exclusion even without an outright ban.

Illinois is the clearest example. SB 3019, signed by Gov. Pritzker on June 16 as part of the state's FY27 budget, amends Illinois' Sports Wagering Act to classify "exchange wagers" tied to sporting events as a form of sports wagering, meaning they're now only legal in Illinois if offered by a state-licensed sports wagering operator.

Kalshi and Polymarket don't hold Illinois licenses and never have, since they're federally regulated by the CFTC rather than licensed as gambling operators. Illinois requires licensees to geofence out anyone not physically in the state, which Kalshi argues directly conflicts with the CFTC's requirement that designated contract markets offer products nationwide on a non-discriminatory basis.

Kalshi sued Illinois on June 24 in the Northern District of Illinois, naming Gov. Pritzker, AG Kwame Raoul, and Illinois Gaming Board members as defendants, arguing SB 3019 violates the Supremacy Clause by regulating contracts under the CFTC's exclusive jurisdiction. SB 3019's provisions technically took effect July 1, but enforcement against Kalshi is on hold while the court weighs that claim.

Kentucky has taken a more straightforward tax-only approach, imposing a 14.25% tax on prediction market wagers rather than a licensing requirement

Neither Kalshi nor Polymarket is treating the state lawsuits as something to simply defend against. Both have gone on offense, filing their own federal suits against state regulators in parallel with the CFTC's action.

• Kalshi has sued gaming regulators in Arizona and Iowa and challenged a $5 million civil penalty proceeding brought by the Ohio Casino Control Commission.
• Polymarket sued New Mexico's attorney general after the state declined to delay enforcement.
• Kalshi, Polymarket, and the CFTC won a preliminary injunction against Minnesota's felony ban on July 27, 2026, when a federal judge ruled the state law is likely preempted by the Commodity Exchange Act. They had argued the ban put the platforms in an impossible position: legally required to serve all eligible US users while also required to block Minnesota residents specifically.

Kalshi's clearest wins remain the Third Circuit's New Jersey ruling and a February preliminary injunction in Tennessee, but it's also faced the sharpest enforcement pressure. State courts in Nevada, Massachusetts, and Michigan have all ordered it to stop operating sports contracts. 

Michigan gave the company a 30-day window to properly geofence the state or face $500,000 per day in penalties, and Nevada has scheduled a contempt hearing over allegations that Kalshi's geofencing isn't actually working as represented. A Michigan judge's June 17 opinion also rejected Kalshi's argument that CFTC rules requiring "impartial access" to its markets conflict with state-by-state blocking, a preemption theory that, so far, has lost in nearly every forum where it's been tested.

The jurisdictional battle is only one front. Even where states have not managed to shut the platforms out, several are moving to tax them.

• Illinois layered per-contract fees of 1.75% to 3.5% onto sports event contracts alongside its new licensing rules.
• Kentucky approved a 14.25% tax on prediction market revenue.
• North Carolina joined them on July 7, 2026, when Gov. Josh Stein signed a state budget imposing a 6% levy on operators' net trading-fee revenue.
• New Jersey lawmakers advanced companion bills that would add a 9% surtax on prediction market operators' income.

At the same time, traditional finance is pushing into the same territory. Cboe Global Markets secured SEC approval to list a new class of binary options tied to companies' key performance indicators, giving investors a yes-or-no stake in corporate results through regulated securities accounts. Federal lawmakers have also floated bipartisan legislation aimed specifically at political event contracts, a sign that Congress may eventually set the ground rules the courts are still fighting over.

As of the end of July 2026, there is no settled national answer to the central question: are sports-related event contracts federally regulated financial instruments, or are they gambling products subject to state law? 

The Third Circuit says one thing, the Southern District of New York says another, and Nevada's Ninth Circuit case could tip the balance further. Industry groups like the American Gaming Association have been actively mobilizing against the platforms across roughly 16 states, citing an estimated $1 billion in displaced sportsbook revenue, while combined monthly trading volume on Kalshi and Polymarket has reportedly grown to nearly $220 billion, up from roughly $28 billion a year earlier.

Most legal observers now expect this to ultimately be resolved by the Supreme Court, but likely not within the next year or two. 

Two developments to watch: the CFTC's public comment period on a proposed rulemaking that would define which categories of event contracts it considers permissible, which closed July 27, 2026, and the Sixth Circuit heard oral arguments on the underlying preemption question on July 30, 2026, in what could become the most authoritative appellate treatment of the issue yet.