Feds Sue States Over Prediction Market Regulation

The federal government has sued Connecticut, Arizona, and Illinois to challenge their efforts to regulate prediction market operators such as Kalshi and Polymarket. According to multiple reports, all three states have issued cease-and-desist orders to these companies, accusing them of engaging in illegal online gambling under state law. Arizona has also filed criminal charges against Kalshi for allegedly violating state gambling laws and a law that makes betting on elections illegal.

The Commodity Futures Trading Commission (CFTC) contends in court filings that it, not the states, regulates these companies. CFTC Chairman Michael S. Selig stated that the agency will safeguard its exclusive regulatory authority over these markets and defend market participants against what he termed 'overzealous state regulators.' He argued that Congress rejected a fragmented patchwork of state regulations due to increased risk of fraud and poor consumer protection.

A federal appeals court ruled on Monday that New Jersey gaming regulators cannot prevent Kalshi from allowing people in the state to use its prediction market to place financial bets on the outcome of sporting events. A three-judge panel of the Philadelphia-based third US circuit court of appeals ruled 2-1 in finding that the CFTC has exclusive jurisdiction over the sports-related event contracts that Kalshi allows people to trade on its platform.

The ruling marked the first time a federal appeals court has ruled on what has become the central issue in an escalating battle over the ability of state gaming regulators to police the activity of prediction market operators. Tarek Mansour, Kalshi’s CEO, said in a social media post on X that this is 'a big win for the industry and millions of users.'

Arizona's criminal charges against Kalshi mark a significant escalation in the legal battle over prediction markets. The Trump administration has thrown its support behind these operators, which could have implications for how sports betting is regulated nationally. Connecticut Attorney General William Tong accused the Trump administration of recycling industry arguments that have been rejected in district courts across the country.

The lawsuits represent a sharp escalation by the federal government to override state laws and set rules for a fast-growing industry that has raised questions about insider trading and profiting off war and suffering. Experts note that these legal actions are not just stating views but actively trying to influence the outcome in favor of prediction markets.

A group of House Democrats pressed the Commodity Futures Trading Commission (CFTC) in a letter sent late Monday, questioning why the agency has not cracked down on bets placed on war and other government actions via offshore prediction markets. The letter, led by Reps. Jim McGovern and Seth Moulton, both Massachusetts Democrats, highlights recent high-profile instances of alleged insider trading related to U.S. government actions, including military interventions in Venezuela and Iran.

The lawmakers argue that the CFTC has the authority to regulate these activities under existing rules and laws. They also raised concerns about potential conflicts of interest involving major market participants and family members of Executive Branch officials, noting Donald Trump Jr.'s involvement with both Kalshi and Polymarket. The Democrats requested a response from CFTC Chair Michael Selig by April 15, emphasizing the need for swift oversight to address corrupt trades.

The controversy surrounding prediction markets continues as lawmakers push legislation to prevent U.S. officials and military personnel from profiting off classified government intelligence. Despite ongoing controversies, Kalshi and Polymarket continue to form partnerships with news organizations and financial services firms, attracting millions of users worldwide.