Prediction Markets and the Law: The State of Play

Prediction markets have gone from a niche corner of the internet to one of the most contested legal questions in American gaming. Platforms like Kalshi and Polymarket now let users trade contracts on the outcome of elections, economic data, and — most controversially — sporting events. In 2025, Kalshi reported that its users were trading more than $1 billion every month, roughly 90% of it tied to sports. That volume is precisely what has put the industry on a collision course with the states.

The fight comes down to a single question that courts, regulators, and Congress cannot agree on: is a contract on the outcome of a football game a federally regulated financial derivative, or is it sports betting wearing a Wall Street suit?

The core dispute

Kalshi is registered with and overseen by the Commodity Futures Trading Commission (CFTC). It argues that this federal registration places its event contracts squarely within the CFTC's exclusive jurisdiction under the Commodity Exchange Act (CEA), and that federal law therefore preempts state gambling and sports-wagering statutes. In plain terms: if the feds regulate it, the states can't touch it.

State regulators see it differently. To them, a wager on a game is a wager on a game, and gambling regulation has been a state police power for as long as anyone can remember. They argue Kalshi is offering unlicensed sports betting and dressing it up as a "swap" to dodge state licensing, taxes, and consumer protections.

Neither side is backing down, and the courts have made the picture more confusing rather than less.

A scorecard of the litigation

The landscape at a glance: 19 states have confirmed litigation or regulatory action over prediction markets, across 29 recorded actions — plus two federal/multi-state actions on top of that. The breakdown includes 13 lawsuits filed, five rulings in favor of the prediction markets (state lost), four rulings against them (state won), four regulatory cease-and-desist actions, one appeals ruling, one criminal charge, and a 38-state attorneys general amicus brief.

A few of those data points deserve a closer look.

The cease-and-desist wave. This started quietly. Through 2025, state gaming regulators in New Jersey, Nevada, Maryland, Arizona, and Illinois (among others) fired off cease-and-desist letters to Kalshi and, in some cases, to Robinhood and Crypto.com, which route trades through Kalshi. Illinois extended the same treatment to Polymarket US in January 2026.

The courts split — badly. Within weeks of each other in early 2026, courts went in opposite directions. A Massachusetts state court issued a preliminary injunction against Kalshi, calling its preemption theory "overly broad" and holding that sports event contracts are subject to Massachusetts gaming law. A federal court in Tennessee did the reverse, granting Kalshi an injunction on the theory that its contracts are likely "swaps" under exclusive federal jurisdiction. Federal courts in Nevada and New Jersey sided with Kalshi; Maryland's federal court did not.

Arizona went criminal. On March 17, 2026, Arizona Attorney General Kris Mayes filed criminal charges against KalshiEX LLC in Maricopa County Superior Court — the first criminal prosecution ever brought against a CFTC-registered prediction market operator. That is a meaningful escalation from the usual civil enforcement playbook.

The first appeals court weighed in. On April 6, 2026, a divided Third Circuit panel ruled 2-1 that the CFTC has exclusive jurisdiction over Kalshi's sports event contracts and that the CEA preempts New Jersey's gambling laws — the first federal appeals court to address the question, and a significant win for the industry.

The AGs lined up. Later that month, 38 state attorneys general signed an amicus brief backing Massachusetts. The coalition's most striking feature is its breadth: red states and blue states, states with legal sports betting and states without it. That near-universal consensus reflects how strongly the states feel about defending gambling regulation as their turf.

The federal government picked a side — its own agency's

In an unusual twist, the CFTC has not stayed neutral. Under the current administration, the agency dropped its earlier appeal in the election-contracts case (KalshiEX v. CFTC) in 2025, and has since gone on offense in defense of its own jurisdiction. The CFTC has sued five states — Arizona, Connecticut, Illinois, New York, and Wisconsin — and won a preliminary injunction blocking Arizona's enforcement. It has filed amicus briefs supporting Kalshi (including in the Ohio appeal in May 2026) and even appeared at the Massachusetts Supreme Judicial Court asserting exclusive jurisdiction. CFTC Chairman Michael Selig told the House Agriculture Committee in April that prediction markets serve a price-discovery function and fall under the agency's exclusive authority.

So the federal regulator and a broad coalition of state regulators are now openly litigating against each other over who gets to govern this market.

The tribes enter the chat

Tribal nations have opened a third front. They argue that sports prediction markets violate gaming compacts and tribal exclusivity rights. The Ho-Chunk Nation's suit in Wisconsin survived a motion to dismiss on its Indian Gaming Regulatory Act claims, and four New Mexico tribes and pueblos — the Mescalero Apache Tribe and the Pojoaque, Sandia, and Isleta Pueblos — filed their own federal suit alleging the platforms enable gambling on tribal land in violation of compacts and federal law. For states where tribal gaming is the backbone of the industry, this adds real weight.

Congress and the states keep moving

The legal battle is not waiting on the courts. In May 2026, Minnesota became the first state to pass an outright ban, with Governor Tim Walz signing legislation making it a felony to operate or advertise prediction markets, effective August 1. Kalshi sued within hours; the CFTC sued Minnesota within a day. Illinois, meanwhile, took the revenue route, adding a tax on prediction markets in its new budget effective July 1.

At the federal level, the STOP Corrupt Bets Act, introduced in June 2026, would ban prediction-market contracts tied to sports, elections, war, and government actions — the most significant federal attempt yet to restrict the sector.

Where this is heading??

The Third Circuit's pro-Kalshi ruling collides directly with district-court losses in places like Nevada and Maryland, and a genuine circuit split is forming. The Ninth Circuit (hearing the Nevada cases) and the Fourth Circuit (hearing Maryland) are expected to rule in the second half of 2026. If either affirms against the platforms, the split is locked in and the Supreme Court's hand is effectively forced — with cert petitions possible by early 2027. Fittingly, traders on the prediction markets themselves currently put the odds of the Supreme Court taking a sports-event-contract case by the end of 2026 at roughly 64%.

Until then, the industry operates in a patchwork: legal and protected in some states, enjoined in others, criminally charged in one, and waiting on appellate courts to sort out a question Congress arguably should have answered itself. For operators, regulators, and anyone with a stake in the integrity of sports, the only safe prediction is continued uncertainty.

Sources: CNBC, Fortune, Sportico, ESPN, S&P Global, The Block, PYMNTS, Holland & Knight, Paul Weiss, Norton Rose Fulbright, Epstein Becker Green, Morgan Lewis, Stinson, NY Attorney General's office, Arizona Capitol Times, RotoWire, and the State Legislative Database Gaming & Betting Laws Map. Litigation in this area is moving quickly; verify case status before relying on any specific holding.