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

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.

Three federal appeals courts have become the fight’s most consequential venues: the Third Circuit (New Jersey), the Ninth Circuit (Nevada), and the Sixth Circuit (Ohio and Tennessee).

Nevada

Nevada handed the platforms their most consequential defeat yet. 

On August 28, 2026, a three-judge panel of the Ninth Circuit Court of Appeals ruled 3-0 against Kalshi, affirming a district court decision to dissolve a preliminary injunction that had blocked the Nevada Gaming Control Board from enforcing its gambling laws against KalshiEX’s sports and election event contracts.

Writing for the panel, Judge Ryan D. Nelson, a Trump appointee, found that Kalshi’s sports event contracts are not “swaps” under the Commodity Exchange Act and are instead sports bets subject to Nevada’s gaming law. 

“For Kalshi to deny that its sports event contracts are sports bets under a reasonable person’s understanding is disingenuous,” Nelson wrote, adding that “everyone, including Kalshi, knows it when they see it.”

The same panel issued two unpublished companion rulings against Crypto.com and Robinhood the same day, rejecting their requests for injunctive relief on similar grounds, though it remanded the question of Kalshi’s election contracts for further review.

On August 13, 2026, King County Superior Court Judge John McHale ordered Kalshi to stop offering, accepting, or facilitating wagers on sports, elections, politics, entertainment, culture, technology, and science, and "mentions" contracts in the state.

The order, part of a preliminary injunction that AG Nick Brown's office won in July, requires Kalshi to put an IP address and residency-based geofence in place by August 19, 2026, and a fuller multi-source geofencing system by September 2, 2026, or face fines of $120,000 a day, the same daily penalty Nevada regulators are separately seeking over an alleged contempt. Wagers on commodities, climate, economics, and finance are unaffected, and customers can still close out existing positions in the blocked categories.

McHale found Kalshi had "willfully ignored" a December 2025 notice from the Washington State Gambling Commission stating that event-based contracts were not authorized in the state. Kalshi asked the Washington Court of Appeals to pause the injunction pending its appeal; the request was denied at both the trial and appeals courts.

Utah delivered a setback to the CFTC's side on August 4, 2026, when US District Judge Robert J. Shelby granted the state summary judgment in KalshiEx LLC v. Cox, the case that Kalshi itself had filed in February 2026 to prevent Utah from applying its gambling laws to the company's event contracts.

Shelby rejected Kalshi's argument that its status as a CFTC-registered exchange puts it beyond the reach of state gambling law, writing that Congress has left gambling to the states since the early 1800s and finding it implausible that the Commodity Exchange Act, written after the 2008 financial crisis, quietly reversed that. 

"Kalshi has not met its burden of showing otherwise," he wrote.

Utah's constitution bans gambling outright, and the state's attorney general said Kalshi's platform lists contracts on game winners, margins, and even who sings at the Super Bowl. 

"You can't rebrand illegal gambling as a federal commodity, and today a federal judge agreed with us," Utah Attorney General Derek Brown said. Twenty-three tribes and gaming associations backed the state's position. Kalshi says it will appeal to the Tenth Circuit. 

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, some states are pursuing a quieter strategy: rather than banning the platforms outright, they're folding prediction markets into their existing sports-wagering licensing frameworks, which can function as a de facto exclusion even without an outright ban.

Illinois is the clearest example. SB 3019, signed by Gov. Pritzker on June 16 as part of the state's FY27 budget, amends Illinois' Sports Wagering Act to classify "exchange wagers" tied to sporting events as a form of sports wagering, meaning they're now only legal in Illinois if offered by a state-licensed sports wagering operator.

Kalshi and Polymarket don't hold Illinois licenses and never have, since they're federally regulated by the CFTC rather than licensed as gambling operators. Illinois requires licensees to geofence out anyone not physically in the state, which Kalshi argues directly conflicts with the CFTC's requirement that designated contract markets offer products nationwide on a non-discriminatory basis.

Kalshi sued Illinois on June 24 in the Northern District of Illinois, naming Gov. Pritzker, AG Kwame Raoul, and Illinois Gaming Board members as defendants, arguing SB 3019 violates the Supremacy Clause by regulating contracts under the CFTC's exclusive jurisdiction. SB 3019's provisions technically took effect July 1, but enforcement against Kalshi is on hold while the court weighs that claim.

Kentucky has taken a more straightforward tax-only approach, imposing a 14.25% tax on prediction market wagers rather than a licensing requirement

The same day as the Washington ruling, the fight gained a new kind of plaintiff. On August 13, 2026, the city of Baltimore sued Kalshi and Polymarket in Baltimore City Circuit Court, the first time a city, rather than a state or the CFTC, has brought a case over prediction markets.

Baltimore's complaint argues that the platforms are "legally indistinguishable" from traditional sportsbooks, since both allow customers to wager on game winners, point spreads, point totals, and player statistics, and that neither company holds a Maryland gambling license. 

"These companies are running sportsbooks without licenses and betting that a new label will put them above the law," Baltimore Mayor Brandon Scott said. "It won't."

Kalshi and Polymarket both pointed to the CFTC's exclusive jurisdiction over their contracts in response. 

"City-specific action runs counter to the CFTC's established framework for regulating prediction markets," a Polymarket spokesperson said, while Kalshi said it "spent years getting regulated by the federal government and abides by all applicable regulations."

One day earlier, on August 12, the New York City Council announced a probe into the marketing practices of prediction markets Polymarket, Kalshi, Coinbase, and Gemini Titan.

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 laws, since Congress has given 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.

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 won a preliminary injunction against Minnesota's felony ban on July 27, 2026, when a federal judge ruled the state law is likely preempted by the Commodity Exchange Act. They had argued the ban put the platforms in an impossible position: legally required to serve all eligible US users while also required to block Minnesota residents specifically.
• Novig has preemptively sued 5 states, including Wisconsin, Massachusetts, New Mexico, New York, and Washington, since it launched its nationwide operations.

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, and the Ninth Circuit affirmed Nevada’s order on appeal in August. 

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.

The jurisdictional battle is only one front. Even where states have not managed to shut the platforms out, several are moving to tax them.

• Illinois layered per-contract fees of 1.75% to 3.5% onto sports event contracts alongside its new licensing rules.
• Kentucky approved a 14.25% tax on prediction market revenue.
• North Carolina joined them on July 7, 2026, when Gov. Josh Stein signed a state budget imposing a 6% levy on operators' net trading-fee revenue.
• New Jersey lawmakers advanced companion bills that would add a 9% surtax on prediction market operators' income.

At the same time, traditional finance is pushing into the same territory. 

Cboe Global Markets secured SEC approval to list a new class of binary options tied to companies' key performance indicators, giving investors a yes-or-no stake in corporate results through regulated securities accounts. Federal lawmakers have also floated bipartisan legislation aimed specifically at political event contracts, a sign that Congress may eventually set the ground rules the courts are still fighting over.

As of late August 2026, the central question is no longer purely theoretical: are sports-related event contracts federally regulated financial instruments, or are they gambling products subject to state law? 

The split is now confirmed, not just widening:

• The Third Circuit ruled for Kalshi in New Jersey in April, and the Ninth Circuit ruled against it in Nevada on August 28, finding sports event contracts are sports bets, not swaps. 
• The Southern District of New York, Utah, and Washington have also sided with regulators at the district court level. 
• The Sixth Circuit, hearing the consolidated Ohio and Tennessee cases, appeared openly skeptical of Kalshi’s preemption argument at oral argument on July 30, 2026, with Judge Eric L. Clay questioning whether “all things are better if they come from the federal government.” 

A ruling against Kalshi there would deepen the split already existing between the Third and Ninth Circuits.

The Supreme Court has already been drawn in procedurally: it granted New Jersey a further extension, to September 3, 2026, to file its petition seeking review of the Third Circuit’s ruling. Sports betting attorney Daniel Wallach suggested Kalshi is more likely to skip a rehearing before the full Ninth Circuit and petition the Supreme Court directly, especially after going 0-3 in front of a panel of three Trump-appointed judges. 

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

Four deadlines to watch next: Washington’s September 2 geofencing cutoff, New Jersey’s September 3 Supreme Court filing deadline, Kalshi’s promised Tenth Circuit appeal of the Utah ruling, and Kalshi’s next move following its Ninth Circuit loss in Nevada.