State Crackdowns and CFTC Counterclaims: Prediction Markets Caught in a Regulatory Crossfire

Original by Odaily Planet Daily (@OdailyChina)

Author: Asher (@Asher_0210)

The expansion of prediction markets in the U.S. is colliding with an increasingly dense wall of regulatory resistance.

In the past, platforms like Polymarket and Kalshi shot to fame using sports, elections, macroeconomics, crypto assets, and social events, packaging the concept of "trading future outcomes" as a new form of information and financial market. However, as user bases and trading categories have expanded, multiple U.S. states are arriving at a very different definition: these are not innovative financial products, but unlicensed online gambling.

From Arizona, Connecticut, and Illinois to New York, Massachusetts, Michigan, Washington, and Nevada, prediction markets are facing lawsuits, injunctions, cease-and-desist letters, and regulatory investigations. More critically, the Commodity Futures Trading Commission (CFTC) has entered the fray, suing several states in an attempt to assert its exclusive regulatory authority over event contract markets. This means the controversy surrounding prediction markets is no longer just about whether a specific platform is compliant, but a direct conflict between federal U.S. regulation and state-level gaming oversight.

Multiple States Sue, Prediction Markets Face Regulatory Scrutiny

On the surface, the regulatory actions by U.S. states target different platforms. Some states go after Kalshi, others target Polymarket, and some have Crypto.com, Robinhood, Coinbase, and Gemini in their sights. However, looking at these cases collectively reveals a highly consistent core concern among regulators: prediction markets are using the guise of "event contracts" to circumvent the regulatory systems states have established for gambling, sports betting, and consumer protection.

Arizona, Connecticut, and Illinois were the first three states to trigger federal counter-lawsuits. These states took regulatory action against platforms like Kalshi, Polymarket, Crypto.com, and Robinhood, arguing that the event contracts they offer may violate state gambling laws. Arizona even filed criminal charges against Kalshi, accusing it of facilitating illegal gambling and touching upon the state's restrictions on election betting. Subsequently, the CFTC sued these three states, arguing that state governments cannot use local gambling laws to interfere with a nationally regulated derivatives market.

New York further escalated this regulatory conflict. New York Attorney General Letitia James sued Coinbase Financial Markets and Gemini Titan, claiming their prediction market operations constitute unlicensed gambling. New York emphasized that these platforms, without a license from the New York State Gaming Commission, allow users to trade on the outcomes of events like sports and elections. Furthermore, the platforms permit users aged 18 to 20 to participate, while New York's minimum age for mobile sports betting is 21.

The common thread in these cases is that state governments are not opposed to "prediction" itself, but believe the platforms are disguising betting as financial transactions to bypass gaming licenses, age restrictions, tax rules, and consumer protection requirements. From the states' perspective, the line between many event contracts and traditional gambling is not clear. Users betting on whether a team will win, the point spread of a game, whether a candidate will be elected, or whether a specific political or entertainment event will occur, are fundamentally wagering on external outcomes beyond their control. While platforms use terms like "contracts," "markets," and "trading," states see users putting in money, betting on an outcome, winning money if correct, and losing their principal if wrong.

Sports-related events represent the most concentrated area of regulatory conflict. Massachusetts previously sued Kalshi, alleging it offered sports betting services without a license. Recently, 38 state attorneys general joined an amicus brief supporting Massachusetts's lawsuit, opposing Kalshi's characterization of sports predictions as financial instruments. The logic in Michigan, Washington, Wisconsin, and other states is largely similar. Their focus is not on whether prediction markets can improve information efficiency, but on whether platforms are offering sports or other event betting services to state residents without obtaining a gambling license.

This means the pressure on prediction markets is no longer limited to native platforms like Polymarket and Kalshi. When mainstream trading platforms like Coinbase, Gemini, Robinhood, and Crypto.com are also drawn in, the issue becomes a compliance problem for the entire industry's entry point. Prediction markets are no longer just a vertical niche but have become a new regulatory variable confronting exchanges, brokers, and crypto platforms alike.

Platforms Fight Back: We Are Not Casinos, But Federally Regulated Financial Markets

In response to state lawsuits, the core counter-argument from platforms like Kalshi and Polymarket is clear: they are not casinos, but providers of event contract markets regulated by the CFTC.

The crux of this logic lies in "regulatory attribution." If event contracts are considered financial derivatives, they should be uniformly regulated by a federal agency, and states cannot use local gambling laws to restrict them individually. If they are deemed gambling products, platforms must navigate a fragmented landscape of state gaming licenses, age limits, tax systems, and market access rules.

This is the line platforms like Kalshi and Polymarket must hold. For them, the primary commercial value of prediction markets is the ability to expand nationally through a financial market framework. If entering each new state requires reapplying for a gambling license, adhering to local sports betting rules, and submitting to review by local gaming regulators, the efficiency of expansion would plummet, and many products might become untenable.

Furthermore, platforms argue that prediction markets are not just entertainment betting; they provide price discovery for the real world. Elections, interest rates, inflation, sports, policy, geopolitical conflicts, and crypto events are fundamentally about uncertainty. Prediction markets use real money to incentivize participants to express their judgments, thereby creating a tradeable, observable probability price.

CFTC Enters the Fray, Escalating the Conflict

The real escalation of this conflict began when the CFTC itself sued state governments.

The CFTC has sued Arizona, Connecticut, and Illinois to prevent them from using gambling laws to regulate prediction markets. Its core argument is that event contracts fall under federally regulated markets, and state governments cannot use local enforcement actions to undermine the national derivatives regulatory framework. Recently, the agency also sued New York State, arguing that New York's enforcement actions against prediction markets infringe upon its exclusive regulatory authority.

This makes the regulatory dispute over prediction markets even more complex. Previously, the public saw conflicts between state governments and platforms; now, the two opposing sides are state governments and federal regulators. One side believes it has the right to protect its residents from illegal gambling, while the other believes states are interfering with federal financial market oversight. Prediction markets are merely the trigger; the underlying battle is about the boundaries of power within the U.S. regulatory system itself.

The New York case is particularly illustrative. After the New York Attorney General sued Coinbase and Gemini, the CFTC quickly took legal action against New York State. New York argues that its state gambling laws must apply to these platforms because "gambling by another name is still gambling." The federal regulator, however, contends that states cannot reclassify federally regulated event contract markets as local gambling activities.

Platforms Not Without Victories, But Risks Are Mounting

Despite the flurry of state regulatory actions, platforms are not solely on the defensive. The New Jersey case represents a key turning point. The Third Circuit Court of Appeals recently ruled in favor of Kalshi, stating New Jersey could not regulate Kalshi's prediction market business. This is seen as a significant victory for platforms on the issue of "federal preemption."

This ruling sends a signal to the prediction market industry – at least in the view of some courts, states cannot easily reclassify federally regulated prediction markets into their own state gaming oversight systems. For platforms like Kalshi, this is not just a win in a single-state lawsuit but crucial support for their narrative of nationwide expansion.

However, this does not mean platforms are safe. Different states, different courts, and different product types may still lead to varying judgments. The regulatory risks for sports contracts, election contracts, crypto-asset-related contracts, and macroeconomic contracts are not the same. The real challenge for platforms is proving they belong to the financial market while explaining why certain products that closely resemble sports betting or political wagering should not be treated as gambling.

The regulatory pressure on prediction markets extends beyond licensing issues. As trading categories expand, platforms are entering inherently sensitive areas, including sports, elections, war, diplomacy, and judicial events. Sports contracts easily run into gambling laws, election contracts clash with political ethics, and contracts related to war and diplomacy may touch upon insider information and national security.

From a Growth Story to a Compliance Showdown

In the past, the story of prediction markets was one of growth. Polymarket broke out through politics and crypto events; Kalshi expanded event contracts leveraging its status as a regulated exchange; platforms like Coinbase, Gemini, and Robinhood also entered the fray. The industry's narrative was clear: all future uncertainties can be priced, traded, and financialized.

But now, prediction markets are being forced into a new phase. It's no longer enough to prove users want to trade events; they must also prove this trading isn't just a more efficient form of gambling. It's not enough to prove market prices have informational value; platforms must show that insiders, candidates, athletes, government officials, and the platforms themselves cannot exploit information advantages. They must not only address user growth but also resolve the complex conflict between federal regulation, state gaming oversight, and consumer protection.

This is the true signal sent by the wave of state lawsuits. U.S. regulators are not simply rejecting prediction markets; they are forcing the industry to answer a fundamental question: When sports, elections, war, macroeconomics, and crypto events can all be bet upon, is this a financial market or an online casino?

If the CFTC ultimately wins the battle for regulatory authority, prediction markets may find a clearer path to federal compliance, accelerating financialization and platformization. However, if states prevail in key cases, the expansion pace of prediction markets will be redefined. Different states may impose varying restrictions on sports, elections, entertainment, and political events, forcing platforms to face higher compliance costs and a more fragmented market structure.

Now, with U.S. states, the CFTC, courts, and platforms all in the arena, this regulatory battle over prediction markets is just getting started.

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