The U.S. prediction market industry, forecast by Macquarie to reach $187 billion in taker volume in 2026 (8.5x the $22 billion recorded in 2025), is caught in an escalating jurisdictional conflict between federal derivatives regulators and state gambling authorities. On October 16, 2026, Crypto.c...
"We will see you in court." — CFTC Commissioner, on states' attempts to regulate prediction markets as gambling, February 2026
The U.S. prediction market industry, forecast by Macquarie to reach $187 billion in taker volume in 2026 (8.5x the $22 billion recorded in 2025), is caught in an escalating jurisdictional conflict between federal derivatives regulators and state gambling authorities. On October 16, 2026, Crypto.com and Novig filed federal lawsuits against Missouri, the latest front in a legal war that now spans 20 states, two opposing federal circuit court rulings, criminal charges in Arizona, and a CFTC-DOJ offensive against three state governments.
The core legal question — whether sports event contracts are federally regulated swaps or state-regulated gambling — remains unresolved. The Third Circuit ruled 2-1 in April that the Commodity Exchange Act preempts state gambling laws. The Ninth Circuit ruled 3-0 in August that it does not. This circuit split has put the issue on a path toward Supreme Court review, with industry participants, state attorneys general, and the CFTC all acknowledging that the nation's highest court will likely have the final word.
The economic stakes are substantial. Kalshi alone generated an estimated $850 million in fee revenue in 2026, according to InGame analysis, with sports contracts driving the bulk. Combined monthly volume on Kalshi and Polymarket more than doubled from $26 billion in May to $53 billion in July, largely driven by 2026 FIFA World Cup markets. The industry's growth trajectory depends directly on the outcome of the jurisdiction fight.
Missouri Attorney General Catherine Hanaway issued cease-and-desist orders between September 16-17, 2026, to six prediction market operators: Kalshi, Polymarket, Crypto.com, Novig, Robinhood, and Underdog. The orders demanded platforms stop offering sports event contracts to Missouri residents within 30 days or obtain a license from the Missouri Gaming Commission and pay a 10% betting tax.
Two of the six responded with litigation. On October 16, the North American Derivatives Exchange (Nadex), the CFTC-registered exchange behind Crypto.com's OG prediction markets platform, filed suit in the Western District of Missouri. Novig filed separately in the Eastern District. Both argue that the Commodity Exchange Act grants the CFTC "exclusive jurisdiction" over their contracts and seek declaratory judgment and permanent injunctions.
According to court records reviewed by The Block, Kalshi, Polymarket, Robinhood, and Underdog have not filed suit. Their strategic calculus remains unclear — they may be waiting for the CFTC's pending rulemaking to resolve the question, or they may have chosen to exit Missouri rather than litigate.
Missouri is the latest of 20 states to move against prediction market platforms through cease-and-desist letters, state court actions, or criminal prosecution. Tennessee's Sports Wagering Council issued similar cease-and-desist letters to Kalshi, Polymarket, and Nadex on January 9, 2026. The pattern is consistent: state gambling regulators classify event contracts as sports wagers and demand licensing, taxation, or withdrawal.
The industry's growth numbers provide context for why the jurisdictional fight has intensified.
According to Pew Research Center data, prediction market trading volume rose from under $5 billion monthly in mid-2025 to approximately $24 billion in April 2026. The 2026 FIFA World Cup drove a further surge: combined June volume across Kalshi and Polymarket hit $44.8 billion, more than triple the approximately $14 billion average monthly handle of all legal U.S. sportsbooks in 2025.
Key volume figures:
| Period | Combined Monthly Volume | Source | |--------|------------------------|--------| | Mid-2025 | ~$5B | Pew Research | | April 2026 | ~$24B | Pew Research | | May 2026 | ~$26B | Pew Research | | June 2026 | $44.8B (Kalshi: $31B, Polymarket: $10.8B) | Platform data | | July 2026 | ~$53B | Pew Research | | September 2026 | $20.1B | Industry data |
September's decline from the July peak reflects the conclusion of World Cup markets. Total September volume of $20.1 billion still represents a 1,079% increase year-over-year.
Kalshi dominates the U.S. regulated market. As recently as March 2026, Kalshi and Polymarket each held roughly 50% of total prediction market volume. By mid-year, Kalshi had pulled ahead, driven by its CFTC-registered status, which provides a regulated on-ramp for U.S. retail and institutional participants. Sacra estimates Kalshi reached $4 billion in annualized revenue by July 2026, up from approximately $735 million in December 2025. Sports contracts account for approximately 87% of Kalshi's volume over the past year, according to data through February 2026.
The fundamental legal question — are sports event contracts "swaps" under the Commodity Exchange Act, or gambling products under state law? — has produced diametrically opposed answers from two federal appellate courts.
Third Circuit (April 6, 2026) — Pro-Platform: In Kalshi v. Flaherty, a 2-1 panel affirmed a preliminary injunction barring New Jersey from enforcing gambling laws against Kalshi's sports event contracts. Circuit Judge David Porter held that sports event contracts are swaps under the CEA and that the Act preempts state laws that "directly interfere" with swaps traded on CFTC-licensed designated contract markets.
Ninth Circuit (August 28, 2026) — Pro-State: In KalshiEX, LLC v. Assad, a unanimous three-judge panel ruled that sports event contracts are not swaps under the CEA and that federal law does not preempt state gambling regulation. The panel dissolved a preliminary injunction that had blocked Nevada gaming regulators from halting Kalshi and Crypto.com operations. Robinhood was similarly denied relief.
The rulings diverge on the threshold statutory interpretation question: whether the CEA's definition of "swap" encompasses event contracts linked to sporting outcomes. The Third Circuit said yes. The Ninth Circuit said no. This textual disagreement ensures the issue cannot be resolved without either congressional action or Supreme Court review.
The CFTC has taken the position that its jurisdiction is exclusive, and it has backed that position with litigation.
On April 2, 2026, the CFTC and the U.S. Department of Justice filed three separate federal lawsuits against Arizona, Connecticut, and Illinois. According to The Block, these were the first instances of the CFTC explicitly suing a state over prediction market jurisdiction. The suits challenged cease-and-desist letters those states had sent to Kalshi, Crypto.com, and Polymarket, arguing the actions were preempted by the CEA.
The Arizona case carries additional weight. In March 2026, Arizona filed the first criminal charges against a major prediction market platform in the U.S., accusing Kalshi of running an illegal gambling operation in violation of state law. The CFTC's subsequent lawsuit against Arizona directly challenged the state's authority to bring such charges.
The federal government's posture is unusually aggressive. A federal regulator suing state governments over jurisdictional turf is rare in financial regulation. It signals the CFTC views the prediction market industry as falling squarely within its statutory mandate — and that it is willing to spend political capital to defend that position.
A coalition of 44 state attorneys general wrote to the CFTC in July 2026 stating that the agency lacks authority to regulate sports-related event contracts. The letter represents near-unanimous state-level opposition to federal preemption.
As of October 2026, 20 states have taken direct action against prediction market platforms through enforcement letters, civil suits, or criminal prosecution. Polymarket is unavailable in at least eight states: Arizona, Nevada, Illinois, Massachusetts, Maryland, Michigan, Montana, and Ohio.
The states' motivations are partially fiscal. Sports gambling generates substantial tax revenue. If prediction markets are reclassified as federally regulated derivatives, states lose both regulatory authority and the associated tax base. Missouri's cease-and-desist orders explicitly demanded platforms either obtain state gambling licenses and pay a 10% betting tax, or cease operations.
Congressional action has also entered the picture. Senator John Curtis (R-UT) and Representative Adam Schiff (D-CA) introduced the Prediction Markets Are Gambling Act on March 23, 2026. If enacted, it would amend the CEA to reclassify sports and casino-style event contracts as gambling outside CFTC jurisdiction.
While courts litigate, the CFTC is simultaneously building a regulatory framework through formal rulemaking.
On September 28, 2026, the CFTC sent two event-contract rules to the White House's Office of Management and Budget for review. The agency formally published them on October 9.
Rule 1 — Inclusion (RIN 3038-AF82): A proposed rule that would add event contracts to the regulatory definition of "swap," formally bringing sports, politics, and weather contracts under CFTC jurisdiction.
Rule 2 — Exclusion (RIN 3038-AF81): An interim final rule that carves casino-style gambling products (traditional sportsbooks, slot machines, table games) out of the swap definition.
The two-rule approach attempts to draw a bright line: prediction markets traded on CFTC-registered exchanges are derivatives. Traditional gambling products are not. If finalized, the rules would provide a regulatory basis for the CFTC's preemption argument that goes beyond statutory interpretation — it would be codified in formal regulation.
The timing is notable. The rules arrived at OMB while the Ninth Circuit ruling remains fresh and while Missouri and other states press enforcement actions. Finalized rules would strengthen the federal government's litigation posture, though they would not automatically override contrary circuit court precedent.
The circuit split between the Third and Ninth Circuits creates the textbook conditions for Supreme Court review. Both rulings involve the same statute, the same industry, and the same core legal question. The outcomes are irreconcilable.
New Jersey officials have stated they plan to petition the Supreme Court regarding the Third Circuit ruling. The Ninth Circuit's contrary holding adds urgency. Legal analysts widely expect certiorari to be granted, though timing remains uncertain.
If the Court sides with the Third Circuit's interpretation — that sports event contracts are swaps and the CEA preempts state gambling law — the prediction market industry gains nationwide regulatory clarity under federal oversight. State enforcement actions collapse. The $187 billion volume projection becomes achievable without state-by-state legal risk.
If the Court sides with the Ninth Circuit — that event contracts are not swaps and states retain authority — the industry faces a patchwork of 50 different regulatory regimes. Platforms would need state-by-state gambling licenses, pay varying tax rates, and potentially withdraw from states where licensing is unavailable or uneconomic.
The jurisdictional outcome determines how economic value flows through the prediction market ecosystem.
Under federal preemption, the value chain is relatively concentrated: platforms collect fees (Kalshi's estimated $850 million in 2026 fee revenue), the CFTC collects registration and compliance costs, and market makers and liquidity providers capture bid-ask spreads. States receive no direct tax revenue from these activities.
Under state gambling regulation, value redistributes. States capture 10-20% of gross gaming revenue through taxes (Missouri's demand was 10%). Licensing requirements create compliance costs that may disadvantage smaller platforms. Operators like Polymarket, which operates on blockchain rails without a U.S. regulatory registration, face existential questions about their ability to operate in any state that requires a gambling license.
The $187 billion volume forecast assumes continued growth under the current hybrid environment. A Supreme Court ruling that fully empowers state regulation could reduce accessible market size by 30-40%, based on the proportion of U.S. states that have taken enforcement action or signaled opposition.
The prediction market industry's $187 billion trajectory depends on a legal question that remains genuinely unresolved. Two federal appellate courts have examined the same statute and reached opposite conclusions. The CFTC is simultaneously litigating against states, promulgating new rules, and defending platforms that generate hundreds of billions in annual volume on its regulated exchanges.
Missouri's October enforcement action — and the lawsuits it triggered — is the latest data point in a pattern that has repeated across 20 states in 2026. Each new state action adds litigation cost and regulatory uncertainty. Each federal court ruling reshapes the landscape. The industry operates in a legal environment where a platform can be a licensed derivatives exchange in one jurisdiction and an unlicensed gambling operation in the next.
The Supreme Court will likely determine the outcome. Until it does, the prediction market industry exists in two legal realities simultaneously — a $187 billion derivatives market and a multi-state illegal gambling operation — depending entirely on which courthouse you walk into.