The Legal War Over Prediction Markets Is Getting Crazier
Last month I wrote about the tug-of-war between the Trump administration and the states over prediction markets. Kalshi, one of the largest U.S. prediction market companies, had just won a favorable ruling from a federal court in Minnesota with the help of a key federal financial regulator. Since then, things have escalated dramatically for the prediction-market industry on multiple fronts.Nevada, which has extensive experience with gambling regulation, had appeared to strike a bargain with Kalshi earlier this year by getting it to agree to a geofencing restriction. In exchange for blocking people within the Silver State from accessing its markets, the state agreed to drop its ongoing case against the company. That agreement fell apart last week after investigators for the Nevada Gaming Control Board were able to circumvent the geofencing services used by Kalshi.Under the terms of the agreement, Kalshi agreed to pay the state $120,000 per day if it failed to implement a geofence by August 12. The company instead lashed out at Nevada regulators by accusing them of providing “falsified information (breaking federal law) to hunt for a loophole and manufacture another legal grievance” against Kalshi. “This is not the behavior of a regulator trying to protect consumers—it is a vindictive waste of taxpayer dollars at the bidding of casinos,” Rick Heaslip, Kalshi’s general counsel, claimed on Twitter last week.The Nevada Gaming Control Board was unamused, to say the least. “Kalshi’s accusations are baseless, and they cannot obscure the fact that Kalshi missed its agreed-upon deadline to comply with Nevada law,” the board said in a statement. “Kalshi’s consistent failures to comply with the court orders left the board with no other choice but to advise the court of Kalshi’s noncompliance.” That could open the door to more punitive sanctions against the company.An even greater legal threat emerged in New York after state officials filed a lawsuit against Kalshi on July 31 for allegedly violating the state’s gambling laws. State law requires sports-betting companies to obtain a license from the state gaming commission and pay taxes on their winnings. New York also alleged that Kalshi violated the state’s age limit for sports betting by allowing 18, 19, and 20-year-olds to place bets on its marketplaces.“No matter what they call themselves, prediction markets like Kalshi are gambling platforms, plain and simple,” New York Attorney General Letitia James said in a statement announcing the lawsuit. “By ignoring our laws, Kalshi is running an illegal operation and harming New Yorkers in the process. We are taking them to court to uphold our laws and protect New Yorkers.”Kalshi first announced that it would take bets on sports events in January 2025, the New York lawsuit noted, and advertised its product as allowing users to “view live sports (and bet).” In practical terms, a Kalshi “sports contract” is functionally no different than a bet to the average consumer. A customer places a wager in the form of purchasing sports contracts on a binary outcome, ranging from whether the Los Angeles Dodgers will win the 2026 World Series to whether Shohei Ohtani will hit a home run during a specific game. If the wager is correct, the bettor receives a larger sum payment.The principal difference between a prediction market and a traditional sportsbook is that the counterparty for the wager isn’t the company itself, but other bettors who are buying and selling “event contracts.” While sportsbooks derive their profit from losing bets by their customers, Kalshi and other prediction markets instead get their revenue from transaction fees for each wager placed.New York state officials first instructed Kalshi to cease and desist its unlicensed sports gambling operation in October 2025. Three days later, Kalshi sued the state to obtain a preliminary injunction that would block New York from enforcing its demands. A federal district court in Manhattan denied those motions last month. On July 31, the state escalated its war by filing its own lawsuit that seeks to recoup all profits from the allegedly unlawful sports-betting operation as well as damages, for a total of $36 billion in penalties, which would exceed Kalshi’s current market capitalization.Leaping to the rescue of Kalshi, Polymarket, and similar enterprises is the Commodity Futures Trading Commission, a federal agency charged with overseeing the nation’s derivatives markets. Under its commissioner Michael Selig, the CFTC has argued that it has the exclusive authority to regulate prediction markets via federal law. It filed a separate lawsuit against New York in April that also sought to stop the state from punishing Kalshi and other prediction markets for offering sports-related bets. Earlier lawsuits sought to stop gambling regulators in Arizona, Connecticut, and Illinois from enforcing their own laws against sports prediction markets.How can the CFTC intervene on behalf of prediction markets? Federal law exclusively allows the agency to regulate derivatives contracts and the markets where they can be bought and sold. Prediction-market companies have argued that their sports-related products are equivalent to derivatives, even though their functional practice is to facilitate sports betting. Traditional sportsbooks have to operate on a state-by-state basis, obtaining licenses and complying with intensive gambling regulatory regimes. Prediction markets can instead seek refuge under the friendly auspices of the CFTC and operate nationwide with limited oversight.In addition to lawsuits like the one in Minnesota earlier this year, the agency can intervene on behalf of prediction markets is by invoking Section 8a(9) of the Commodity Exchange Act. That provision, which was designed to address a “market emergency,” allows the CFTC to “direct” a commodity or derivatives market to “take such action as in the Commission’s judgment is necessary to maintain or restore orderly trading in or liquidation of any futures contract.” This power is rarely invoked, with only four previous instances between the years of 1976 and 1980.After laying moribund for the last 46 years, the CFTC has invoked those powers three times in 2026 to direct prediction markets to ignore state regulators and even the courts. Earlier this month, it issued an order instructing Kalshi to continue normal operations in New York—that is, to keep offering sports-betting products on its markets—despite the legal actions taken by New York gambling regulators.“If New York can ban event contracts, it logically could ban any derivatives product that the Commission regulates, including basic futures contracts, on the erroneous basis that trading in these products contravenes New York’s gambling laws,” the agency claimed. “In that case, New York would wield existential control over every entity that offers derivatives products and is headquartered in New York—the financial capital of the world.”A federal district court in Connecticut, for example, ruled earlier this month that Kalshi’s sports-betting contracts do not fall under the CEA, meaning that the CFTC can’t override state gambling regulators. When Kalshi notified the court of the CFTC’s order to keep operating in New York, Judge Vernon Oliver found it to be “not compelling” because the court had already ruled that such contracts are outside the CFTC’s jurisdiction—a conclusion also reached by a federal trial judge in New York.“The Court ‘must exercise independent judgment in determining the meaning of statutory provisions,’” Oliver wrote, quoting from the Supreme Court’s landmark decision that overturned Chevron deference two years ago. “It has done so here in finding that Connecticut’s gambling laws do not conflict with the CEA. Nothing in the CEA takes away statutory interpretation from the Courts, and as an administrative agency, the CFTC lacks the authority to dictate an order that conflicts with this Court’s decision.”This legal battle is existential for the prediction-market industry. While prediction markets offer a wide range of event contracts, taking wagers on major sports events is an integral part of their business strategy. By one estimate, sports betting accounted for between 85 and 90 percent of trading volume on U.S. prediction markets. Bloomberg reported last week that more than 1 in 4 Gen Z investors consider sports betting to be part of their long-term financial strategy—a disturbing finding on its own terms. Prediction markets hope to siphon off as much of that potential revenue as possible from traditional sportsbooks.Selig, the CFTC chair, has touted his agency’s role in protecting and nurturing prediction markets, which he says can “produce a lot of useful information” by “forecasting” future events. “We are making sure that we don’t let these markets languish or that we don’t push them offshore,” he said at an industry event earlier this month, “but we develop the right rules and regulations to develop investor protections and make sure that the markets are flourishing here in the United States.”According to one litigation tracker, the CFTC alone has sued nine states over their efforts to regulate prediction markets, while legal battles between states and prediction markets themselves over sports betting in some form are underway in roughly half of the Union. At stake is a vast market that seeks to extract billions of dollars from younger Americans under the guise of gamified investments. Its ultimate fate—and the scope of the CFTC’s authority over sports-event contracts—will likely be decided by the institution that kicked off the sports-betting craze eight years ago: the Supreme Court of the United States.
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