CFTC vs. States: Inside the Fight Over Who Regulates Prediction Markets

The dispute traces back to a simple but consequential legal theory. 

Kalshi and Polymarket's US arm both operate as Commodity Futures Trading Commission (CFTC)-registered Designated Contract Markets (DCMs) that trade "event contracts" under the Commodity Exchange Act. 

As those platforms expanded from political and economic forecasting into sports, state gambling regulators saw something that looked a lot like an unlicensed sportsbook wearing a different label. The platforms, in turn, argue that federal registration places them entirely beyond the reach of state gambling law, since Congress gave the CFTC exclusive jurisdiction over derivatives markets.

That disagreement escalated fast. 

States began issuing cease-and-desist letters and filing lawsuits; the CFTC, under Chairman Michael Selig, started suing back, not to punish the platforms, but to sue the states directly and block their enforcement actions before they could take hold.

The CFTC's litigation campaign has moved in waves:

• April 2, 2026: Arizona, Connecticut, and Illinois were all sued the same day, each case seeking a declaration that state enforcement against Kalshi and Polymarket is preempted by federal law.
• Late April 2026: Wisconsin was added within days of the state itself filing felony-level suits against Kalshi, Polymarket, Crypto.com, Robinhood, and Coinbase. New York followed around the same stretch.
• May & early June 2026: New Mexico, Minnesota, and Rhode Island joined the list.
• June 23, 2026: Kentucky became the ninth state sued, days after AG Russell Coleman announced lawsuits against Kalshi, Polymarket, and VGW. This signaled that the fight had stopped tracking any obvious partisan line, as this kind of federal action was the first taken against a Republican attorney general.

The pattern is consistent: a state moves against the platforms, and the CFTC moves against the state, typically within days to weeks.

What makes this fight harder to predict and more likely to reach the Supreme Court is that federal courts have not lined up behind a single answer.

New Jersey

The clearest win for the platforms came on April 6, 2026, when the Third Circuit Court of Appeals ruled 2-1 in Kalshi's favor, upholding a preliminary injunction against New Jersey. 

The majority found that sports event contracts qualify as "swaps" under the Commodity Exchange Act, giving the CFTC both field and conflict preemption over state gambling law. It was the first federal appellate ruling squarely on the merits, and it briefly looked like the industry's legal foundation was solidifying.

New York

Then, on July 7, 2026, the Southern District of New York went the other way. 

Judge Analisa Torres denied Kalshi a preliminary injunction against New York's enforcement effort, ruling that the Commodity Exchange Act does not preempt New York's gambling laws and that Kalshi hadn't shown a likely path to success on the merits. New York Governor Kathy Hochul wasted no time in publicly framing the win, and the state's AG cited the ruling as supplemental authority in the CFTC's own suit against New York, turning the federal government's argument back on it in the same case.

Nevada

Nevada's fight is following a similar arc: its case is now before the Ninth Circuit, and by most accounts the panel leaned toward the state during oral argument. A ruling for Nevada would deepen the split even further, setting up exactly the kind of unresolved conflict between circuits that tends to get the Supreme Court's attention. 

Massachusetts had already reached a similar conclusion at the trial court level in January 2026.

The most aggressive move yet came in mid-July. 

On July 14, 2026, a Michigan state court ordered Kalshi to cancel trades that had already been executed. The CFTC responded by invoking its emergency authority to block the cancellation, describing it as the first time a state had tried to directly unwind completed derivatives transactions, rather than simply block future access. 

This is an altogether different kind of confrontation from a cease-and-desist letter or a licensing dispute, as it signals that the fight now includes the mechanics of executed trades, as well as market access.

While the jurisdictional battle plays out in court, a quieter parallel trend is emerging: instead of trying to restrict platforms or ban them outright, some states are simply moving to tax them. 

Illinois adopted a tiered "exchange wager" transaction tax on sports-related event contracts as part of its FY27 budget (1.75% on the first five million wagers annually, rising to 3.5% beyond that).

This workaround sidesteps the preemption fight almost entirely: taxation doesn't require proving the contracts are "gambling," only that they're taxable transactions occurring within the state.

Neither Kalshi nor Polymarket is treating the state lawsuits as something to simply defend against. Both have gone on offense, filing their own federal suits against state regulators in parallel with the CFTC's action.

• Kalshi has sued gaming regulators in Arizona and Iowa and challenged a $5 million civil penalty proceeding brought by the Ohio Casino Control Commission.
• Polymarket sued New Mexico's attorney general after the state declined to delay enforcement.
• Kalshi, Polymarket, and the CFTC are also jointly seeking to block Minnesota's felony ban, arguing the law puts the platforms in an impossible position: legally required to serve all eligible US users while also required to block Minnesota residents specifically.

Kalshi's clearest wins remain the Third Circuit's New Jersey ruling and a February preliminary injunction in Tennessee, but it's also faced the sharpest enforcement pressure. State courts in Nevada, Massachusetts, and Michigan have all ordered it to stop operating sports contracts. 

Michigan gave the company a 30-day window to properly geofence the state or face $500,000 per day in penalties, and Nevada has scheduled a contempt hearing over allegations that Kalshi's geofencing isn't actually working as represented. A Michigan judge's June 17 opinion also rejected Kalshi's argument that CFTC rules requiring "impartial access" to its markets conflict with state-by-state blocking, a preemption theory that, so far, has lost in nearly every forum where it's been tested.

As of mid-July 2026, there is no settled national answer to the central question: are sports-related event contracts federally regulated financial instruments, or are they gambling products subject to state law? 

The Third Circuit says one thing, the Southern District of New York says another, and Nevada's Ninth Circuit case could tip the balance further. Industry groups like the American Gaming Association have been actively mobilizing against the platforms across roughly 16 states, citing an estimated $1 billion in displaced sportsbook revenue, while combined monthly trading volume on Kalshi and Polymarket has reportedly grown to nearly $220 billion, up from roughly $28 billion a year earlier.

Most legal observers now expect this to ultimately be resolved by the Supreme Court, but likely not within the next year or two. 

Two dates worth watching closely: the CFTC's public comment period on a proposed rulemaking, which would define which categories of event contracts it considers permissible, closes July 27, 2026, and the Sixth Circuit hears oral arguments on the underlying preemption question on July 30, 2026, in what could be the most authoritative appellate treatment of the issue yet.