Prediction markets trigger multi-state legal war over whether federal law preempts state gambling rules

Kalshi is a prediction market platform that registers with the CFTC as a , the same legal category as the Chicago Mercantile Exchange. Kalshi lists event contracts, which allow users to buy and sell positions on the outcome of sports events, elections, and other real-world occurrences. Sports contracts drive more than 90% of Kalshi's activity. Kalshi argues that its CFTC registration makes it a federally regulated financial exchange, and that the Supremacy Clause preempts state gambling licensing requirements.

Polymarket operates similarly, also claiming CFTC registration as a shield against state gambling enforcement. States with active gaming commissions disagree. 🏛️Massachusetts, 🌰Ohio, 🌵Arizona, 🎰Nevada, 🦞Connecticut, 🌽Illinois, 🏖️New Jersey, and 🎸Tennessee have all taken legal or regulatory action against prediction market platforms. Sports betting was legalized state-by-state after the Supreme Court's struck down the Professional and Amateur Sports Protection Act. States that built gaming licensing regimes view Kalshi and Polymarket as unlicensed competitors operating outside the consumer protection frameworks those states constructed.

Courts reached contradictory conclusions on the preemption question in a span of seven weeks. In January 2026, Suffolk County Superior Court Judge CBChristopher Barry-Smith issued a from operating in 🏛️Massachusetts, concluding that CFTC oversight can coexist with state gambling laws and that Congress never intended to displace state consumer protection authority. Barry-Smith said Kalshi took an overly broad view of federal law. Massachusetts Attorney General AJAndrea Joy Campbell had sought the injunction.

In February 2026, a federal court in 🎸Tennessee ruled the opposite: that the Commodity Exchange Act preempts Tennessee's gambling licensing requirements. On March 9, 2026, U.S. District Judge SDSarah D. Morrison and sided with the state, aligning with 🏛️Massachusetts. Morrison wrote that treating sports event contracts as federal swaps would have 'a seismic impact' on Indian tribes' authority to regulate gaming on tribal land. 🌰Ohio, 🎰Nevada, 🏖️New Jersey, 🗽New York, and Tennessee all filed the Massachusetts ruling as supplemental authority in their own proceedings.

🌵Arizona Attorney General KMKris Mayes escalated the dispute on March 17, 2026, under Arizona gambling statutes: 16 counts of unlawful betting and wagering and four counts of election wagering. Criminal charges against a federally registered exchange are extraordinary. No state had previously pursued criminal enforcement against a CFTC-registered platform. Mayes argued that Kalshi's sports event contracts are illegal gambling under Arizona law regardless of CFTC registration and that the Supremacy Clause doesn't immunize criminal conduct when federal law doesn't expressly preempt state criminal jurisdiction.

Kalshi called the charges filed to circumvent federal court and short-circuit the normal judicial process. Kalshi CEO TMTarek Mansour has consistently argued that prediction markets are financial instruments, not gambling. Polymarket Chief Legal Officer NKNeal Kumar echoed that position, stating: "Congress gave the CFTC, not states, exclusive authority over event contracts."

CFTC Chairman MSMichael Selig signaled in January 2026 that the agency would proceed with formal rulemaking to clarify its jurisdiction over prediction markets. The CFTC shifted under Selig from its previous posture of skepticism toward event contracts, to active support for the sector. The Obama-era CFTC had proposed rules that would have banned political and sports prediction contracts.

Senators JCJohn Curtis (R-UT), Adam Schiff (D-CA), and Catherine Cortez Masto (D-NV) introduced , the bipartisan Prediction Markets Are Gambling Act, on March 23, 2026. The bill, referred to the Senate Agriculture, Nutrition, and Forestry Committee, would prohibit CFTC-registered exchanges from listing contracts that closely resemble a sports bet or casino-style game. Cortez Masto stated that event contracts dealing with sports and casino games are that fall entirely within the jurisdiction of tribes and states. DraftKings entered the prediction market space on April 1, 2026, suggesting the established gambling industry views CFTC-registered prediction markets as a competitive threat it needs to join rather than simply fight.

The core federalism question is whether Congress, when it passed the Commodity Exchange Act and authorized event contracts on CFTC-registered exchanges, intended to displace state gambling regulation. Courts use three preemption doctrines: express preemption (Congress said so explicitly), field preemption (Congress occupied the entire regulatory space), and conflict preemption (complying with both state and federal law is impossible, or state law obstructs federal purposes). 🏛️Massachusetts and 🌰Ohio found that state gambling licensing and federal CFTC regulation can coexist, meaning neither express nor conflict preemption applies. 🎸Tennessee found that requiring a CFTC-registered exchange to also get a state gambling license conflicts with the federal regulatory scheme.

The dispute also implicates tribal gaming rights. Native American tribes operate casinos under the Indian Gaming Regulatory Act and pay licensing fees to states. 🌰Ohio Judge Morrison warned that treating sports event contracts as federal swaps would have a . If CFTC-registered prediction markets can operate nationwide without state licensing, it undermines the state-tribal compacting system that governs tribal gaming. Senators Curtis, Schiff, and Cortez Masto specifically cited tribal sovereignty as a reason to pass S. 4160.

On April 2, 2026, the Trump Justice Department and the CFTC against 🌵Arizona, 🦞Connecticut, and 🌽Illinois, seeking to block state enforcement actions against prediction market platforms. The lawsuits argued that state attorneys general exceeded their authority by pursuing criminal and civil enforcement against companies registered with the CFTC as Designated Contract Markets. The DOJ's intervention marked the first time the federal executive branch directly sided with prediction market platforms against state law enforcement in court.

CFTC Chairman MSMichael Selig stated that 🌵Arizona's decision to against CFTC-registered companies sets a dangerous precedent threatening the entire framework of federal financial regulation. The simultaneous filings in three states signaled a coordinated federal strategy to establish preemption through litigation rather than waiting for Congress or the Supreme Court to act. 🦞Connecticut Attorney General WTWilliam Tong and 🌽Illinois Attorney General KRKwame Raoul both pledged to contest federal jurisdiction.

The Third Circuit Court of Appeals in April 2026 in a case involving 🏖️New Jersey's gambling enforcement actions, the first federal appellate court to rule on CFTC preemption of state gambling law. The majority found that the Commodity Exchange Act gives the CFTC exclusive jurisdiction over event contracts on registered Designated Contract Markets, and that state gambling licensing requirements face both field preemption and conflict preemption under the CEA.

Judge Jane Roth , calling Kalshi's products "virtually indistinguishable from the betting products available on online sportsbooks" and arguing that the presumption against preemption should apply with special force in traditional state gambling regulation territory. The Third Circuit covers 🔔Pennsylvania, 🏖️New Jersey, and 🐔Delaware. The ruling directly contradicted the March 2026 decision by 🌰Ohio U.S. District Judge Sarah Morrison, creating a split between a federal appellate court and multiple district courts that hadn't yet produced appellate rulings.

U.S. District Judge MLMichael Liburdi, a Trump appointee in the District of 🌵Arizona, granted on April 10, 2026, blocking Arizona's criminal prosecution. Liburdi wrote that the CFTC had made a clear showing it is likely to succeed on the merits of its preemption claim. The TRO ran through April 24, 2026, and called off a Monday arraignment hearing that had been scheduled for Kalshi.

The TRO halted 🌵Arizona AG KMKris Mayes's filed March 17. Mayes's office pledged to contest the TRO and said Arizona wouldn't abandon its position that Kalshi operates illegal gambling under state law regardless of CFTC registration. CFTC Chairman Selig called the TRO confirmation that Arizona's approach set a dangerous precedent. Judge Liburdi was appointed by President Trump in 2020.

The Ninth Circuit Court of Appeals heard oral arguments on April 16, 2026, in consolidated cases brought by Kalshi, Robinhood, and Crypto.com against 🎰Nevada's gambling enforcement actions. Judges Ryan Nelson, Bridget Bade, and Kenneth Lee, all during his first term, heard the appeals. The panel appeared to lean toward Nevada, with Judge Nelson directing sharp skepticism at prediction markets' preemption arguments and stating from the bench that 'can't be a serious argument'.

If the Ninth Circuit rules for the states, a direct circuit split with the Third Circuit's ruling would make Supreme Court review almost certain, according to . The Ninth Circuit covers nine western states: 🌴California, 🎰Nevada, 🌵Arizona, 🌲Washington, 🌲Oregon, 🥔Idaho, 🦌Montana, 🐻Alaska, and 🌺Hawaii. These states together represent nearly a third of the U.S. population. The outcome would determine whether prediction markets operate nationwide under a single federal framework or must navigate 50 different state licensing regimes.