Prediction markets processed $53 billion in combined monthly volume at their July 2026 peak, yet the legal framework governing them is fracturing across U.S. federal circuits. Four appellate courts have now issued conflicting rulings on whether the Commodity Futures Trading Commission holds exclu...
"By skirting New York's laws, Polymarket is targeting the most vulnerable and depriving New York families of critical services and support." — Letitia James, New York State Attorney General
Prediction markets processed $53 billion in combined monthly volume at their July 2026 peak, yet the legal framework governing them is fracturing across U.S. federal circuits. Four appellate courts have now issued conflicting rulings on whether the Commodity Futures Trading Commission holds exclusive jurisdiction over event contracts or whether states retain the power to regulate them as gambling. New Jersey, Crypto.com, Robinhood, and the North American Derivatives Exchange have filed petitions for certiorari, pushing the dispute toward the U.S. Supreme Court.
The split pits the CFTC's claim to exclusive federal oversight against state attorneys general — led by New York — who have filed lawsuits against both Kalshi and Polymarket within two months of each other. On September 24, New York sued Polymarket for operating an unlicensed gambling business; the company countersued the same day, arguing federal preemption bars state enforcement. The Sixth Circuit deepened the divide on September 25 by ruling against Kalshi, holding that sports event contracts are not swaps and that states may apply their gambling laws. Combined, these actions create a jurisdictional vacuum that leaves a market now exceeding $45 billion in monthly volume without a settled regulatory address.
Prediction markets were a niche product as recently as late 2024. By 2025, Polymarket and Kalshi generated approximately $38–39 billion of the industry's $44 billion in total notional volume, according to Pew Research Center data. The trajectory accelerated sharply in 2026:
Market share has shifted. DeFi Rate's tracker placed Kalshi at roughly 73% of combined volume in early July, against Polymarket's 27%. Kalshi recorded $37.17 billion in August volume; Polymarket and its U.S. arm combined for $8.16 billion. Polymarket US, which launched in December 2025, hit $111.4 million in open interest by late August, nearly doubling since mid-July.
By early 2026, Polymarket's monthly unique wallets had reached 840,000, nearly tripling in six months. The platform's monthly trading volume, which hovered around $1.2 billion through much of 2025, entered sustained double-digit-billion territory by early 2026, according to TRM Labs.
These are not speculative side bets. They represent a market whose annualized run-rate now exceeds $500 billion — larger than many traditional derivatives verticals — without a settled answer on who regulates it.
The central legal question is deceptively simple: are prediction market event contracts "swaps" under the Commodity Exchange Act, thereby falling under the CFTC's exclusive federal jurisdiction? Or are they gambling products subject to state gaming commissions?
Four federal circuits have weighed in. They disagree.
Third Circuit (April 2026): Ruled in Kalshi's favor. A divided panel held that event contracts are swaps and that the Commodity Exchange Act preempts state gambling regulation. The court affirmed a preliminary injunction preventing New Jersey from enforcing its gambling laws against Kalshi. This was the first federal appellate ruling on the preemption question.
Eighth Circuit (2026): Ruled against Kalshi, finding that sports-related event contracts are not swaps. However, the circuit's reasoning left some ambiguity about the scope of its holding.
Ninth Circuit (August 28, 2026): A unanimous three-judge panel ruled against Kalshi, holding that sports event contracts are not swaps under the CEA and that federal law does not preempt Nevada's gambling regulation. The ruling blocked Kalshi from operating on tribal lands in Nevada.
Sixth Circuit (September 25, 2026): Ruled unanimously that Ohio and Tennessee may apply their state gambling laws to Kalshi's sports event contracts. The panel held that Kalshi had not demonstrated its contracts meet the statutory definition of a swap. The court went further, stating that even if the contracts were swaps, the Commodity Exchange Act does not preempt the states' gambling statutes.
The scorecard: one circuit (Third) says federal law preempts state gambling regulation of prediction markets. Three circuits (Sixth, Eighth, Ninth) say it does not — at least for sports-related contracts. This 3-to-1 split across federal appeals courts creates what Bloomberg Law described as a "classic circuit split" that typically compels Supreme Court review.
New York has emerged as the most aggressive state enforcer. Attorney General Letitia James, backed by Governor Kathy Hochul, has filed separate lawsuits against both major prediction market platforms within a two-month window.
Kalshi (July 31, 2026): New York sued Kalshi in state court, alleging the company operated an illegal gambling business without obtaining a license from the New York State Gaming Commission or paying applicable taxes. The lawsuit seeks an injunction, fines, restitution, and forfeiture of profits.
Polymarket (September 24, 2026): New York filed a nearly identical complaint against QCX LLC, doing business as Polymarket US. The state alleged Polymarket allows users under 21 to gamble — a violation of New York law — and that its event contracts meet the legal definition of gambling because outcomes are "uncertain and outside the control of the bettor."
Polymarket responded within hours, filing its own civil suit against James and the New York State Gaming Commission. The company's complaint argued that New York is overstepping its authority by applying state gambling laws to a federally regulated derivatives exchange: "This action seeks to prevent imminent and irreparable harm arising from New York's enforcement of state gambling laws against federally regulated derivatives exchanges — enforcement Congress has expressly prohibited."
The dueling lawsuits from September 24 represent a direct constitutional confrontation over federal preemption. Polymarket's position mirrors the CFTC's own stance: the commission has "strongly supported the industry's federal-preemption argument," according to CNBC, stating that Congress created a national system for derivatives markets and vested the CFTC with exclusive authority.
New York is not alone. Polymarket has previously filed preemptive suits against Massachusetts, Michigan, and Minnesota. In April 2026, the federal government sued three states for attempting to bring Kalshi and Polymarket under state control. Arizona separately charged Kalshi with illegal election betting.
The CFTC has pursued two parallel tracks while courts litigate its jurisdiction.
Proposed Rule (June 10, 2026): The commission published a proposed rule establishing a framework for determining when event contracts may be prohibited as contrary to the public interest. The rule creates a three-step sequential analysis: (1) whether the contract is an event contract in an excluded commodity; (2) whether it "involves" an enumerated activity — unlawful activity, terrorism, assassination, war, gaming, or similar; and (3) whether the contract is contrary to the public interest. The comment period closed July 27, 2026.
Under the proposed framework, the CFTC must initiate review within 10 days of a contract's listing and issue any prohibition order within 90 days. Failure to issue an order results in deemed approval.
Mention Markets Advisory (September 22, 2026): The CFTC's Division of Market Oversight issued guidance warning that "mention" contracts — those based on specific words or phrases, event attendance, public appearances, and interactions between individuals — present elevated manipulation risk. The advisory is informational and creates no new legal obligations, but it signals the CFTC is drawing boundaries around contract types it considers problematic. Exchanges remain responsible for compliance with Core Principle 3 of the Commodity Exchange Act, which requires designated contract markets to list only derivatives not readily susceptible to manipulation.
The circuit split has generated multiple petitions for Supreme Court review.
New Jersey: Filed a petition for certiorari by September 3, 2026, asking the Court to resolve whether the Commodity Exchange Act preempts state regulation of prediction market event contracts. New Jersey lost at the Third Circuit and wants the ruling reversed.
Crypto.com and Robinhood: Filed separate petitions in September 2026 seeking review of their Ninth Circuit losses against Nevada. Both companies want the Court to affirm that the Commodity Exchange Act preempts state gambling regulation of contracts traded on CFTC-registered exchanges. Notably, the two companies recently announced a prediction market partnership in which Robinhood took an equity stake in Crypto.com.
North American Derivatives Exchange: Filed a petition on September 11, 2026.
The Supreme Court has not yet agreed to hear any of the cases. Market participants speculate a possible hearing as soon as November 2026 or before the end of Q2 2027, according to Sportico. A 3-to-1 circuit split — with the Third Circuit on one side and the Sixth, Eighth, and Ninth on the other — creates strong procedural grounds for certiorari.
The core question the Court would resolve: does the Commodity Exchange Act give the CFTC exclusive jurisdiction over event contracts traded on designated contract markets, or do states retain concurrent authority to regulate those contracts as gambling?
The jurisdictional uncertainty carries material economic consequences.
For platforms: Kalshi and Polymarket face a patchwork of state-by-state enforcement actions. Operating legally in New Jersey (Third Circuit: federal preemption applies) while facing gambling charges in New York (state enforcement ongoing) and Nevada (Ninth Circuit: state regulation permitted) creates compliance costs and legal exposure that scale with geographic expansion.
For market structure: The prediction market industry's annualized volume run-rate exceeds $500 billion. Without jurisdictional clarity, exchanges cannot build durable compliance infrastructure. Whether a contract requires a CFTC registration, a state gaming license, both, or neither depends on which federal circuit the user resides in.
For the broader derivatives ecosystem: The preemption question extends beyond prediction markets. If the Supreme Court rules that the CEA does not preempt state regulation of event contracts, the precedent could affect other CFTC-regulated products where state law and federal oversight intersect. Conversely, a broad preemption ruling could limit states' ability to regulate novel financial products.
For crypto and DeFi: Polymarket's onchain arm operates on Polygon. Its $111.4 million in open interest and 840,000 monthly unique wallets make it one of the largest onchain applications by user count. A ruling that subjects onchain prediction markets to state gambling laws would impose licensing and compliance requirements that conflict with the permissionless architecture of blockchain-based markets.
The prediction markets industry grew from a $44 billion annual curiosity in 2025 to a $500 billion-plus annualized market in 2026. Its legal framework did not keep pace. Four federal circuits have issued irreconcilable rulings, New York has launched enforcement actions against both major platforms, and the CFTC is simultaneously writing rules and defending its jurisdictional claim in court.
The economic value at stake is not the platforms themselves but the regulatory precedent. A Supreme Court ruling on CEA preemption will define the boundary between federal derivatives oversight and state gambling regulation for any future product that blurs the line — from sports event contracts to political prediction markets to onchain derivatives.
Until the Court acts, the industry operates under what amounts to regulatory Schrödinger's cat: simultaneously a federally regulated derivatives market and an illegal gambling operation, depending on which side of a state line the user sits.