Feds sue three states over prediction markets regulations

The Commodity Futures Trading Commission said last week it had filed lawsuits against three states over their efforts to rein in prediction markets.

The federal agency filed suit against Arizona, Connecticut and Illinois, challenging those states’ efforts to, it said, “outlaw, regulate, or otherwise restrain” prediction markets, which are offered by the likes of Kalshi and Polymarket. In its lawsuits, the CFTC said it is the sole regulator of prediction markets, as they are designated contract markets.

“The CFTC will continue to safeguard its exclusive regulatory authority over these markets and defend market participants against overzealous state regulators,” CFTC Chairman Michael Selig said in a statement accompanying the lawsuits. “This is not the first time states have tried to impose inconsistent and contrary obligations on market participants, but Congress specifically rejected such a fragmented patchwork of state regulations because it resulted in poorer consumer protection and increased risk of fraud and manipulation.”

Arizona Attorney General Kris Mayes filed criminal charges against Kalshi last month and accused the company of operating an illegal gambling business in the state. The case alleges that Kalshi broke state law that bans unlicensed wagering businesses and allowed bets on elections in Arizona. The company has already preemptively sued the state to argue it is subject to federal regulations, not state.

The CFTC’s lawsuit in U.S. District Court against Arizona Gov. Katie Hobbs, as well as Mayes and the state Department of Gaming’s Director Jackie Johnson and Chief Law Enforcement Officer Douglas Jensen said the state is incorrect to crack down on Kalshi and its peers in the prediction market sector as they are “doing precisely what is permitted under federal law,” specifically the Commodity Exchange Act, which provides a national law to govern designated contract markets.

The lawsuit takes issue with a 2025 cease and desist letter sent by Arizona’s gaming regulator to Kalshi, as well as the filing of criminal charges against the company last month. It calls on the court to declare that any efforts by the state to regulate prediction markets are preempted by federal law.

“Arizona’s attempt to shut down federally regulated [designated contract markets] intrudes on the exclusive federal scheme Congress designed to oversee national swaps markets,” the suit reads.

Connecticut’s Department of Consumer Protection sent cease and desist orders last year to three platforms — Robinhood, Crypto.com and Kalshi — for conducting what it called at the time “unlicensed online gambling, specifically sports wagering.” 

The agency accused the prediction markets operators of violating state law by leaving users’ personal information vulnerable, not having integrity controls in place to prevent insider betting and for advertising to those on the state’s Voluntary Self-Exclusion List for problem gamblers, and on college campuses.

This year, Gov. Ned Lamont has looked to come down even harder on prediction markets with legislation that would ban them from being used by or advertised to consumers under 21.

“Prediction markets, while not federally defined as gaming or gambling, operate much like sports betting and share many characteristics that present risks for addiction without the established statewide consumer protections,” Lamont said in a fact sheet. “These platforms can be linked to compulsive behaviors, financial distress, and high-risk gambling patterns, especially among impulsive individuals.”

The CFTC’s lawsuit against Connecticut notes the three cease and desist letters the state has sent to prediction markets operators, and again notes that federal law preempts any state action on the topic.

“By prohibiting these [designated contract markets] from operating in Connecticut without a Connecticut license or by conditioning their operation on compliance with Connecticut laws and regulations, Defendants directly interfere with Plaintiffs’ authority pursuant to the federal scheme imposed by Congress through the [Commodity Exchange Act],” the lawsuit says.

The Illinois Gaming Board has also sent cease and desist orders to various prediction market operators, while in November the body issued a memorandum to say that prediction markets “constitute illegal gambling” under state law. The state board also warned that anyone operating a prediction market in the state, including gambling companies who have sought to move into the space, risk forfeiting their licenses to operate.

Those three cease and desist letters are similar to the other states’ actions on prediction markets, and the lawsuit notes that Congress has acted repeatedly to protect the CFTC’s jurisdiction and preempt any state activity. The federal agency said those states were trying to restrict its role, contrary to the law.

“The entire point of the CEA is to create a uniform and predictable nationwide market for futures trading, and the CFTC oversees that market via its certification process of DCMs and its requirements for DCMs to comply with the self-certification or submission certification requirements before listing event contracts,” the lawsuit says. “Defendants’ letters and threatened legal actions would undermine that uniformity, thwart Congress’s scheme, and intrude on Plaintiffs’ exclusive jurisdiction by subjecting CFTC-regulated DCMs to regulation in all 50 states.”