The U.S. Commodity Futures Trading Commission has sued five states — Arizona, Connecticut, Illinois, New York, and is defending against actions in Nevada and Massachusetts — in an escalating federal preemption battle over who regulates the $20 billion-per-month prediction markets industry. On Apr...
"It doesn't matter if it's on sports, politics or anything else — if it's a validly offered product within a CFTC-regulated exchange, then we regulate that." — Mike Selig, Chairman, Commodity Futures Trading Commission
The U.S. Commodity Futures Trading Commission has sued five states — Arizona, Connecticut, Illinois, New York, and is defending against actions in Nevada and Massachusetts — in an escalating federal preemption battle over who regulates the $20 billion-per-month prediction markets industry. On April 24, the agency added New York to its complaint docket after Attorney General Letitia James sued Coinbase and Gemini for operating prediction markets without state gambling licenses. One day earlier, Wisconsin filed its own suits against Kalshi, Polymarket, Coinbase, Robinhood, and Crypto.com.
The conflict marks the most significant federal-state jurisdictional showdown in derivatives regulation since the Supreme Court struck down the Professional and Amateur Sports Protection Act in Murphy v. NCAA (2018). A Third Circuit ruling on April 6 sided with federal preemption in a 2-1 decision, but a conflicting Massachusetts state court ruling in January creates a circuit split that may force Supreme Court review. Meanwhile, Kalshi's valuation reached $22 billion in March after raising $1 billion from Coatue Management, and the platform is launching perpetual futures contracts on April 27, further blurring the line between prediction markets and traditional derivatives exchanges.
CFTC Chairman Mike Selig, four months into his tenure, has made prediction market preemption his signature initiative. On April 2, the agency filed suits against Arizona, Connecticut, and Illinois after all three states sent cease-and-desist letters to CFTC-regulated prediction market platforms. The agency secured a temporary restraining order against Arizona, where state prosecutors had pursued criminal charges against platform operators.
On April 24, the CFTC added New York to the lawsuit roster. In a complaint filed in Manhattan federal court, the agency argued that New York Attorney General Letitia James's enforcement actions "intrude on the exclusive federal scheme Congress designed" under the Commodity Exchange Act (CEA), 7 U.S.C. § 2(a)(1)(A). The CFTC seeks a declaratory judgment that federal law grants exclusive authority over event contracts and a permanent injunction preventing New York from enforcing state gambling laws against federally registered exchanges.
The CFTC also filed an amicus brief in the Massachusetts Supreme Judicial Court, reaffirming its position on exclusive jurisdiction. Selig told reporters: "I wouldn't say, just because these are the first states, that they'll be the last."
The legal theory is straightforward: the CEA field-preempts state regulation of any product listed on a CFTC-registered Designated Contract Market (DCM). Since Kalshi operates as a DCM and its event contracts are classified as "swaps" under the Act, states have no concurrent jurisdiction — regardless of whether the contracts resemble sports wagers.
States are not retreating. On April 24, Wisconsin's Department of Justice filed three separate lawsuits in Dane County Circuit Court against Kalshi, Polymarket, Coinbase, Robinhood, and Crypto.com. The state alleges that event contracts are wagers — users pay money to take a position on a real-world outcome and receive a fixed payout if correct — and therefore constitute unlicensed gambling under Wisconsin law.
Wisconsin's filings specifically target the distribution chain: one suit names Kalshi alongside distribution partners Robinhood and Coinbase (both of which route prediction market orders to Kalshi). The state alleges Kalshi generates more than $1 billion annually from sports contracts, roughly 90% of its estimated total revenue. Wisconsin is not seeking financial damages — only an injunction preventing the platforms from accepting wagers from state residents.
In New York, Attorney General James sued Coinbase and Gemini earlier in the week, calling their event contracts "quintessentially gambling" because outcomes are outside bettors' control. The legal argument categorizes prediction markets alongside DraftKings and FanDuel rather than alongside CME Group or ICE.
The state-level theory of the case is that federal classification as a "swap" does not transform what is functionally a sports bet into a financial instrument. This argument carries weight with some judges: in January 2026, a Massachusetts state court issued a preliminary injunction barring Kalshi from offering sports event contracts to in-state users without a gaming license, explicitly rejecting the federal preemption argument.
On April 6, the U.S. Court of Appeals for the Third Circuit issued the first federal appellate ruling on prediction market preemption. In KalshiEx, LLC v. Mary Jo Flaherty, No. 25-1922, a 2-1 panel held that the CEA preempts New Jersey state gambling laws when applied to sports-related event contracts traded on CFTC-registered designated contract markets.
The court affirmed the district court's preliminary injunction restraining New Jersey officials from enforcing state law against Kalshi. The majority concluded that Kalshi's sports-related event contracts constitute swaps under the Act, bringing them under exclusive federal oversight.
Judge Roth dissented, arguing that Kalshi's sports offerings are "virtually indistinguishable from the betting products available on online sportsbooks, such as DraftKings and FanDuel."
This creates a functional circuit split with the Massachusetts ruling. Legal analysts at Holland & Knight, Norton Rose Fulbright, and Paul Weiss have each published analyses concluding that Supreme Court review is probable if the split persists. The question would test the intersection of federal preemption and state gambling authority at the highest level for the first time since Murphy v. NCAA.
The financial stakes explain the intensity of the fight. According to TRM Labs, prediction market monthly volume exceeded $20 billion by early 2026. Total notional trading volume reached $44 billion in 2025, with Polymarket ($21.5 billion) and Kalshi ($17.1 billion) accounting for approximately $38-39 billion of the total.
Kalshi's valuation trajectory illustrates the capital at risk:
| Date | Valuation | Round Size | Lead Investor | |------|-----------|-----------|---------------| | June 2025 | $2B | $185M | Paradigm | | October 2025 | $5B | $300M | Andreessen Horowitz | | December 2025 | $11B | $1B | — | | March 2026 | $22B | $1B | Coatue Management |
Polymarket is raising at a reported $15 billion valuation, a $7 billion discount to Kalshi. Fortune reported on April 21 that Polymarket's crypto ties may be one reason for the gap.
By March 2026, Kalshi held 52.6% market share with $6 billion in 30-day volume. Polymarket reported $9.7 billion in 30-day volume. Polymarket set a single-day volume record of $425 million on February 28, 2026, surpassing its Election Day 2024 high.
For states, the concern is revenue leakage. Regulated sports betting generated over $15 billion in state tax revenue in 2025 across 38 legalized jurisdictions. If prediction markets continue to siphon sports wagering volume under federal exemption, state gaming commissions face a structural loss of both regulatory authority and tax base.
The rapid scaling of prediction markets has outpaced the fraud enforcement framework. Two law professors found $143 million had been earned on Polymarket from February 2024 through February 2026 using insider information, flagging more than 200,000 suspicious bets.
On April 24, CNN reported that a Fort Bragg master sergeant named Gannon Ken Van Dyke was accused of using insider information from U.S. Army Special Operations to earn more than $400,000 on Polymarket. Van Dyke reportedly had access to operational details about the capture of Venezuelan President Nicolás Maduro in January.
On April 22, Kalshi suspended three congressional candidates for "political insider trading" — betting on their own races. A broader CNN investigation found a pattern of well-timed bets on military and geopolitical events that preceded public announcements.
Congress has introduced S. 4060, the Prediction Markets Security and Integrity Act of 2026, which would prohibit trading on material nonpublic information on prediction market platforms. The United States Attorney for the Southern District of New York stated at the February 2026 Securities Enforcement Forum: "That's a crime. Because it's a prediction market doesn't insulate you from fraud."
The CFTC's claim to exclusive jurisdiction may complicate enforcement. If event contracts are federally regulated swaps, then insider trading provisions of the CEA apply rather than state fraud statutes. But the CEA's insider trading provisions were designed for commodity markets, not geopolitical event betting.
On April 21, Bloomberg reported that Kalshi plans to launch perpetual futures contracts on cryptocurrency prices starting April 27, following CFTC approval for its affiliate Kinetic Markets to operate as a Futures Commission Merchant (FCM) with margin trading capabilities. Polymarket announced its own perpetual futures offering the following day.
Perpetual futures — derivative contracts without expiration dates tied to asset prices — are a $150+ billion daily market on offshore crypto exchanges. Kalshi's entry would make it the first CFTC-regulated platform to offer perps to U.S. retail traders, directly competing with Coinbase and Robinhood.
The product launch raises new jurisdictional questions. Perpetual futures on crypto prices are more clearly financial instruments than event contracts on NFL games. But Kalshi's expansion from binary event contracts into open-ended derivatives signals that the prediction market category is converging with traditional exchange infrastructure — potentially strengthening the CFTC's preemption argument by making the "gambling" characterization harder to sustain.
The jurisdictional debate is not limited to U.S. federalism. On April 24, Brazil's National Monetary Council issued Resolution No. 5,298, prohibiting derivative contracts based on non-economic events including sports, elections, and cultural outcomes. The telecommunications regulator Anatel blocked 27 prediction market platforms, including Kalshi and Polymarket.
Finance Minister Dario Durigan described the platforms as "gambling schemes disguised as financial instruments" — precisely the characterization U.S. states are making. By Friday, Brazilian users reported both platforms were inaccessible.
Brazil's action illustrates the global regulatory convergence on this question: if event contracts look, function, and are used like gambling, does a regulatory classification as a "swap" or "derivative" change their fundamental nature?
The prediction markets jurisdictional battle is the most consequential federal-state regulatory conflict in U.S. derivatives law in a decade. The outcome will determine whether a $20 billion-per-month industry operates under a single federal framework or a patchwork of 50 state gambling regimes. With a circuit split, five active federal lawsuits, multiple state enforcement actions, and a Supreme Court path visible, resolution is unlikely before 2027 at the earliest.
The underlying policy question is binary: are event contracts financial instruments or wagers? The answer carries implications far beyond prediction markets. If the CFTC's preemption argument prevails, any product listed on a DCM — regardless of its functional resemblance to gambling — would be immune from state consumer protection and gambling laws. If states prevail, the CFTC's exclusive jurisdiction over derivatives markets narrows materially.
For the $22 billion Kalshi and $15 billion Polymarket, the stakes are existential. A state-by-state gambling framework would require licensing in each jurisdiction, dramatically increasing compliance costs and potentially blocking access to the most lucrative markets. The platforms' collective response — rapid product expansion into perpetual futures, broader crypto derivatives, and political contracts — suggests a strategy of making their exchanges look more like CME Group and less like DraftKings before the Supreme Court weighs in.