Kalshi, Polymarket face 44-state legal assault as CFTC asserts authority

Forty-four state attorneys general are challenging the Commodity Futures Trading Commission's authority over prediction markets, pitting federal derivatives law against state gambling statutes in a dispute that now involves the Trump administration and nearly every state.

The CFTC this month exercised emergency authority after New York filed suit, ordering Kalshi to continue operating under the Commodity Exchange Act's Core Principles. The agency said federal law requires a uniform national market in derivatives transactions.

The legal picture is split. The U.S. Court of Appeals for the Third Circuit sided with Kalshi in April against New Jersey, concluding its sports contracts qualify as swaps under federal law and that the Commodity Exchange Act preempts state gambling regulation. But Massachusetts issued a preliminary injunction in January preventing Kalshi from offering sports event contracts there without complying with state gaming laws. Nevada prevailed at the district court level, with a judge dissolving an earlier injunction protecting Kalshi from state enforcement. New York Attorney General Letitia James sued Kalshi in July, seeking a temporary restraining order and at least $36 billion in damages. Baltimore filed its own suit against Kalshi and Polymarket on Aug. 13.

The outcome will determine whether prediction markets operate as federally regulated financial exchanges or face state-by-state gambling licensing requirements. The Prediction Markets Are Gambling Act, introduced by Sens. John Curtis and Adam Schiff in March, would stop CFTC-regulated exchanges from offering contracts that resemble sports bets or casino games.

The White House weighs in

President Donald Trump said in May it is "critically important" for the CFTC to keep exclusive authority over prediction markets. His oldest son, Donald Trump Jr., owns an equity stake in Kalshi. The New York Times reported the dispute has drawn in the Trump administration and the president's son.

Speaker Mike Johnson has blamed foreign bettors for prediction markets favoring Democrats in the House race. Kalshi gives Democrats an 86 percent chance of winning the U.S. House, with over $30 million traded on the market. Polymarket gives Democrats an 88 percent chance, with about $10 million in trading volume. The Silver Bulletin's generic congressional ballot average had Democrats ahead by 6.6 percentage points as of Tuesday.

Sports partnerships deepen as legal fight widens

Kalshi announced exclusive multi-year partnerships with five MLB teams — the Atlanta Braves, Boston Red Sox, Los Angeles Dodgers, San Diego Padres and San Francisco Giants. Four of those teams are in states where traditional sports betting is illegal or faces legal challenge. Nearly 13 billion baseball-related contracts have been traded on Kalshi in 2026, up from roughly 355 million over the same period last year.

Polymarket has partnered with the New York Yankees and Major League Soccer, while Novig signed with the New York Mets in July. The American Gaming Association says states have missed out on over $1.3 billion in gaming tax revenue since prediction markets started offering sports contracts.

The legal fight has broader implications for the crypto and Web3 regulatory environment. If states prevail, prediction markets would need to obtain gambling licenses in every jurisdiction where they operate — a compliance burden that could push smaller platforms out of the market. If the CFTC's authority holds, prediction markets gain a federal regulatory shield that could accelerate their expansion into mainstream finance and sports. The MLB itself entered a memorandum of understanding with the CFTC in March to facilitate information sharing on the integrity of baseball event contracts.

This article is for informational purposes only and does not constitute investment advice.