US Regulators Sue States Over Prediction Market Restrictions

The DOJ and CFTC have sued Arizona, Illinois, and Connecticut to stop state-level crackdowns on prediction platforms like Kalshi and Polymarket.

On April 2, the Department of Justice and the Commodity Futures Trading Commission (CFTC) filed lawsuits against the states of Arizona, Illinois, and Connecticut. The federal authorities allege that local governments are violating federal law by attempting to restrict the operations of prediction platforms such as Kalshi and Polymarket.

Federal Jurisdiction vs. State Restrictions

The core of the dispute lies in the legal classification of so-called event contracts. According to the CFTC, these contracts are “swaps” under the Commodity Exchange Act, which places them entirely under federal oversight.

The regulator argues that as a Designated Contract Market (DCM), Kalshi falls within the scope of federal regulation. This status limits the right of individual states to apply local gambling laws to these types of financial products.

CFTC Chairman Michael Selig warned that varying regulatory regimes at the state level would create a “fragmented environment,” increasing the risk of fraud and weakening consumer protections.

Arizona as a Key Battleground

Arizona has emerged as a central front in this conflict. State Attorney General Kris Mayes has taken aggressive action against Kalshi, including the filing of criminal charges.

The state contends that the platform functions as an unlicensed gambling service. Authorities have paid particular attention to contracts related to elections, including the Arizona gubernatorial race.

The federal lawsuit challenges these actions as unconstitutional, arguing that they undermine federal legislation and create legal uncertainty for the industry.

Court Ruling Strengthens Regulator Position

On April 6, the Third Circuit Court of Appeals issued a ruling that provides significant support to the federal position. The court ruled that contracts on sporting events can be classified as financial derivatives because they have real economic consequences.

Judges rejected the argument that sports do not represent a financial asset. They pointed to substantial revenue from advertising, media rights, and sponsorships as evidence of inherent economic value.

This decision creates an important precedent for ongoing cases and increases the likelihood that the federal framework will prevail over state-level restrictions.

Upcoming Key Events

The legal battle is far from over. New hearings in federal courts are expected throughout April, including cases involving companies like Robinhood and Crypto.com.

In parallel, the CFTC is preparing new regulatory rules for prediction markets, with the deadline for public comments set for the end of the month.

Analysts expect that discrepancies in court rulings across different jurisdictions could lead to intervention by the U.S. Supreme Court later this year.