Federal Government Sues States to Defend Prediction Markets Against Gambling Restrictions

Prediction Markets Face State Crackdowns While Federal Government Steps In

Prediction markets such as Kalshi allow users to place bets on real-world events, from geopolitical developments to election outcomes. A $100 position on an event contract could yield up to $400, depending on timing and platform. However, residents in states suing Kalshi may find themselves unable to profit from their predictions.

In April, Wisconsin filed a lawsuit against Kalshi and other prediction market platforms, alleging they facilitate illegal sports gambling. The move reflects a broader trend: Arizona, Connecticut, Illinois, New Jersey, and Massachusetts have also taken legal action against these platforms, treating them as traditional gambling operations.

Yet the federal government has emerged as an unlikely ally for prediction markets. The U.S. Commodity Futures Trading Commission (CFTC), the agency responsible for regulating financial markets, has filed legal challenges against these states. The CFTC argues that the Commodity Exchange Act (CEA) grants it "exclusive jurisdiction" over prediction markets, which function as financial marketplaces rather than gaming houses.

The CFTC has not only countersued the states but has also filed amicus briefs in the U.S. Court of Appeals for the 9th Circuit and the Supreme Judicial Court of Massachusetts to support prediction markets.

Irony: Federal Government Once Tried to Block Prediction Markets

The CFTC’s current stance contrasts sharply with its 2023 decision to block Kalshi from trading contracts tied to U.S. political party control. The agency labeled these "political event contracts" as illegal gaming and contrary to the public interest. Kalshi challenged the order, and the U.S. District Court for the District of Columbia ruled in its favor, finding that election-related contracts neither involve illegal activity nor constitute gaming.

The U.S. Court of Appeals for the D.C. Circuit later upheld this decision, reinforcing the legal standing of prediction markets under federal law.

States Push Back Despite Federal Support

Despite the CFTC’s intervention, states continue to pursue legal action. In 2025, Massachusetts became the first state to sue a prediction market, accusing Kalshi of neglecting age restrictions, player protection programs, state taxes, and other consumer safeguards.

A coalition of 38 states and Washington, D.C., filed an amicus brief supporting Massachusetts’ lawsuit. They argue that the CEA bans event contracts tied to illegal acts—such as war or gaming—or activities the CFTC deems "contrary to the public interest."

However, Judge Jia M. Cobb rejected this argument in a 2024 ruling. In her decision, Cobb stated that the CEA "specifically preempts the application of state law to derivative markets" and that event contracts do not "amount to" terrorism, assassination, or war. She clarified that while the CFTC can reject contracts based on criminal conduct—such as a plane sabotage scenario—the agency cannot block contracts on lawful events, even if they involve contentious topics.

What’s Next for Prediction Markets?

The legal battles between states and the federal government highlight a growing divide over the regulation of prediction markets. As these platforms gain popularity, their classification as financial instruments or gambling tools remains hotly contested. The CFTC’s aggressive defense of its jurisdiction suggests that federal oversight will continue to shape the future of prediction markets in the U.S.