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

Kalshi and Polymarket's US arm operate as CFTC-registered Designated Contract Markets that list "event contracts" under the Commodity Exchange Act. As they expanded from political and economic forecasting into sports, state regulators began to see unlicensed sportsbooks. The platforms say federal registration puts them beyond state gambling law.

States answered with cease-and-desist letters and lawsuits. The CFTC, under Chairman Michael Selig, responded by suing the states directly to block enforcement.

Federal appeals courts are split on whether Kalshi's sports contracts are federally regulated swaps or state-regulated sports bets.

Nevada: Ninth Circuit rules against Kalshi

On August 28, a three-judge Ninth Circuit panel ruled 3-0 to affirm the dissolution of an injunction that had shielded Kalshi from the Nevada Gaming Control Board. Judge Ryan D. Nelson wrote that Kalshi's sports contracts are not "swaps" under the Commodity Exchange Act and are sports bets under Nevada law, calling it "disingenuous" for Kalshi to say otherwise.

Kalshi has requested a rehearing before the full court. Nevada opposes Kalshi's related request to delay that rehearing until the CFTC finishes revising its event-contract rules, calling it an attempt to prolong operations.

Ohio and Tennessee: Sixth Circuit rules against Kalshi

On September 25, the Sixth Circuit held that Ohio and Tennessee can enforce their gambling laws against Kalshi's sports contracts. The panel found the contracts are not swaps because sports outcomes carry no inherent financial, economic, or commercial consequence. It added that the Commodity Exchange Act wouldn't block state enforcement even if they were. 

The court affirmed the Ohio ruling and vacated Kalshi's Tennessee injunction.

Kalshi met its deadline to respond, filing its rehearing petition on October 9. The filing argues that the panel's reasoning conflicts with the Third and Ninth Circuits and relies on the CFTC's same-day rulemaking to claim the court got the "swap" question wrong.

New Jersey: Third Circuit sides with Kalshi, and the Supreme Court looms

The Third Circuit's April ruling is the industry's biggest win. It held that sports-event contracts qualify as swaps, thereby precluding the application of New Jersey's gambling law. On September 2, New Jersey Attorney General Jennifer Davenport petitioned the Supreme Court to review it. The case, Flaherty v. KalshiEX, was docketed September 8 as No. 26-299. Kalshi's response is due November 9.

The justices have not yet agreed to hear the case, and both appeals rulings so far involve preliminary injunctions, which may complicate their use as vehicles for review. A decision on whether to take the case is not expected until December at the earliest. 

Attorneys general for 39 states and the District of Columbia filed an amicus brief on October 7 supporting New Jersey. The bipartisan coalition, led by Ohio Attorney General Andy Wilson, argues that lower courts are badly divided on whether states can enforce their gambling laws against prediction market operators.

On October 8, the NFL filed its own brief. The league argues that sports prediction contracts are effectively gambling, not financial swaps subject to exclusive federal oversight. It says football accounted for $1.8 billion in prediction market trading on the first Sunday of the 2026 season, more than half the total volume across all sports that week. 

The NFL says it isn't opposed to prediction markets outright, but it wants a minimum age of 21 (Kalshi currently allows customers as young as 18) and limits on contract types it considers vulnerable to manipulation, such as proposition-style markets on missed field goals, fumbles, injuries, or officiating decisions. 

Kalshi told CNBC that the CFTC's ongoing rulemaking will address many of those concerns. 

State and local officials in Washington, Utah, New York, Michigan, Illinois, and Baltimore have taken Kalshi and other prediction markets to court or legislated against them. Most rulings have favored the states, though an Illinois federal judge sided with Kalshi and the CFTC on October 2, setting up a conflict with a Wisconsin decision now on appeal to the Seventh Circuit.

Washington

On August 13, a King County judge ordered Kalshi to stop offering contracts on sports, elections, politics, entertainment, culture, technology, science, and "mentions," and to geofence the state. The court found Kalshi had "willfully ignored" a December 2025 state notice. 

Commodities, climate, economics, and finance contracts are unaffected, and users can close existing positions. 

Courts denied Kalshi's request to pause the order.

Utah

On August 4, a federal judge granted the state summary judgment in a case that Kalshi itself filed. The judge reasoned that Congress has left gambling to the states since the early 1800s and that a post-2008 law is unlikely to have quietly reversed that. 

"You can't rebrand illegal gambling as a federal commodity," said Attorney General Derek Brown. 

Twenty-three tribes and gaming associations backed the state. Kalshi says it will appeal to the Tenth Circuit.

New York

On July 7, a federal judge denied Kalshi a preliminary injunction, ruling that the Commodity Exchange Act does not preempt New York's gambling laws. 

On July 31, New York sued Kalshi in state court, alleging an unlicensed gambling operation that reaches users aged 18 to 20 and avoids taxes that licensed operators pay. It seeks restitution and fines of three times Kalshi's gains. ESPN reported a minimum estimate of $36 billion.

"Prediction markets like Kalshi are gambling platforms, plain and simple," said Attorney General Letitia James. 

The CFTC warned that allowing a single state to enforce its laws could bring federally regulated markets to the "brink of destruction." Kalshi called the suit "political theater."

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

Michigan

On July 14, a state court ordered Kalshi to cancel trades it had already executed. The CFTC invoked emergency authority to block the cancellation. It was the first attempt by a state to unwind completed derivatives trades rather than just restrict access.

Michigan has since pressed its case outside the courtroom. Kalshi stopped offering sports contracts in the state in June after a temporary restraining order, and Robinhood agreed to halt its sports contracts in September. 

Coinbase has now agreed with the Michigan Gaming Control Board to stop offering sports event contracts on October 10, closing out any existing contracts. Related appeals are pending at the Sixth Circuit, whose September ruling strengthened Michigan's position. 

Illinois

Illinois took the licensing route. SB 3019, signed June 16, classifies sports-related "exchange wagers" as sports wagering and makes them legal only through state-licensed operators. Kalshi sued on June 24. 

On October 2, Judge Martha Pacold granted partial preliminary injunctions to Kalshi, Coinbase, and the CFTC. She found the contracts likely qualify as swaps and that Illinois's licensing requirements and related criminal provisions likely conflict with federal law. She reserved judgment on the state's new wagering fees. 

The ruling conflicts with a Wisconsin federal court decision denying the CFTC similar relief, which is now on appeal to the Seventh Circuit.

Baltimore, Maryland

On August 13, Baltimore sued Kalshi and Polymarket, the first city to bring a prediction-market case. The complaint argues the platforms are "legally indistinguishable" from sportsbooks and hold no Maryland license. 

Both platforms point to the CFTC's exclusive jurisdiction.

To date, the CFTC has sued nine states since April 2 to block state enforcement against prediction markets, and Chairman Selig argues that uniform federal oversight protects consumers. 

States and tribes counter that these products are sports betting. 

Nine states sued

The CFTC's litigation has moved in waves:

• April 2: Arizona, Connecticut, and Illinois, each seeking a declaration that state enforcement is preempted.
• Late April: Wisconsin, days after the state filed felony-level suits against Kalshi, Polymarket, Crypto.com, Robinhood, and Coinbase, followed by New York.
• May and early June: New Mexico, Minnesota, and Rhode Island.
• June 23: Kentucky, the first suit against a Republican attorney general.

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

The Kentucky court canceled its October 9 oral argument and ordered supplemental briefs due October 23. New argument dates have not been set.

Selig's Pitch: Federal Oversight as Consumer Protection

In an interview with CNBC on Oct. 5, Selig was asked whether retail traders get a fair shake on prediction markets. He didn't dispute that new markets can be inefficient, comparing them to early stock and commodity markets, and said the CFTC will police misconduct, citing recent enforcement actions.

He then turned to the states. Selig said he has "serious concerns" about states suing CFTC-registered platforms and arguing the products belong under tribal compacts or casino frameworks, which he said would leave an order book without market-based controls. In his framing, uniform federal standards protect consumers.

States, tribes, and now the NFL see it the other way. Nevada's gaming chair calls these products sports betting that needs state oversight, and tribal groups have backed state positions in Utah and are expected to file in the Supreme Court case. 

The NFL, which maintains an advertising ban on prediction platforms, argues that neither the CFTC nor the platforms have banned manipulation-prone bet types or set a 21 age limit.

Rulemaking

On June 10, the CFTC proposed amendments to Regulation 40.11 that would set a 90-day, contract-by-contract review process for event contracts involving enumerated activities, including "gaming." Comments closed July 27. 

On October 9, the CFTC acted on two fronts:

It issued an interim final rule excluding state- and tribally licensed casino-style gambling products from the "swap" definition, effective upon publication in the Federal Register, with a 30-day comment period. The same day, it proposed a separate rule that would do the opposite for event contracts tied to sports, politics, culture, and weather, explicitly defining them as swaps, which would need to be finalized to take effect. 

Kalshi cited the proposed rule in its Sixth Circuit rehearing petition filed hours later, arguing the agency's own rulemaking undercuts the panel's conclusion that its contracts aren't swaps.

Kalshi and Polymarket are on offense as well as defense. Kalshi has sued regulators in Arizona and Iowa and challenged an Ohio penalty proceeding. Polymarket sued New Mexico's attorney general. Novig has preemptively sued five states.

Kalshi, Polymarket, and the CFTC won a preliminary injunction against Minnesota's felony ban on July 27, with the court finding it likely preempted by federal law. Kalshi's wins now include the Third Circuit ruling and the October 2 Illinois decision. The February Tennessee injunction was vacated by the Sixth Circuit. 

State courts in Nevada, Massachusetts, Michigan, and Washington have ordered it to stop sports contracts. A Michigan judge also rejected Kalshi's argument that CFTC "impartial access" rules conflict with state-by-state blocking.

Even where states haven't shut platforms out, several are taxing them:

• Illinois: per-contract fees of 1.75% to 3.5% on sports event contracts (under review in federal court).
• Kentucky: 14.25% on prediction market revenue.
• North Carolina: 6% on net trading-fee revenue, signed July 7.
• New Jersey: companion bills would add a 9% surtax.

The stakes are large: combined monthly volume on Kalshi and Polymarket has reportedly grown from roughly $28 billion to nearly $220 billion in a year.

The question has shifted from whether courts disagree to how soon the Supreme Court steps in, and the pressure on the justices is growing. 

New Jersey's petition now has backing from a bipartisan 39-state coalition and the NFL. Robinhood and Crypto.com are pursuing a review of the Ninth Circuit's contrary ruling, which could allow the court to consider both sides of the split.

Timing is the open question. Wallach outlined a fastest-case path in which the justices take up the cases in December or January, hear arguments in March or April, and rule by June 2027. He called that the quickest scenario, with a later decision at least as plausible, and said that if review isn't granted by early next year, a ruling would likely not come until 2028 at the earliest.

What Could Slow SCOTUS Decision

• Rehearing in the Ninth Circuit: Kalshi's en banc petition is pending, though Wallach put the odds of it being granted as minuscule. A denial would leave a cleaner conflict for the justices.
• CFTC rulemaking: The agency and Robinhood argue the court should wait for the new rules (see above).
• Preliminary-injunction posture: Both appeals rulings so far involve preliminary injunctions rather than final judgments.

Legal observers still expect the Supreme Court to weigh in eventually, though not necessarily soon.

Dates to Watch

• October 23: Supplemental briefs due in the CFTC's case against Kentucky.
• November 9: Kalshi's response to New Jersey's Supreme Court petition.
• December at the earliest: Supreme Court decision on whether to hear the case.
• Pending: the Ninth Circuit's decision on Kalshi's en banc petition.
• Pending: the Seventh Circuit's review of the Wisconsin ruling; fee briefing in Illinois.

Whether you can trade sports contracts on a prediction market now depends on where you live, and that can change quickly. Before signing up anywhere, check your state's current status and compare platforms.