Prediction markets are fueling a high-stakes brawl between states and federal regulators

As prediction markets’ volumes grow at a ruthless pace, their businesses are being challenged by states across the country. The federal government is fighting a multifront battle to stop them and assert their regulatory authority. 

Sixteen states are involved in legal proceedings against prediction market platform companies, while one state has moved to ban them entirely.

The Commodity Futures Trading Commission argues it’s the only entity that can regulate these platforms, and the agency has sued six states to defend what it describes as its “exclusive jurisdiction” over prediction markets.

Minnesota became the latest in the government’s crosshairs on Tuesday, when the commission sued it after Gov. Tim Walz signed a law as part of a broader online safety package that would ban prediction markets from operating in the state — a first in the country.

Jeff Le Riche, a former chief trial attorney at the CFTC and now a partner at Husch Blackwell, said the aggressive strategy isn’t typical of the federal agency. “The suing of states is unusual,” he said. “That’s definitely a different tactic.”

CFTC Chair Michael Selig has been clear since his confirmation by the U.S. Senate in December about his views on the agency’s oversight of prediction markets. He also is the only member on the commission, for now, which typically is a body of five. 

“States cannot circumvent the clear directive of Congress,” Selig said in an April press release announcing a lawsuit against Wisconsin. “Our message to Wisconsin is the same as to New York, Arizona, and others: if you interfere with the operation of federal law in regulating financial markets, we will sue you.”

Scrambling partisan divides

The battle between states and the federal government for oversight of prediction markets has scrambled typical partisan divides.

Eleven states that have ongoing legal proceedings against prediction markets have Democratic attorneys general, while five have Republican ones. Minnesota, where state legislators moved to ban prediction markets, passed the law in both its state House and Senate by wide majorities, despite those chambers being divided narrowly by party. 

“I wouldn’t say that it’s that surprising just because of the state versus federal issues,” said Jon Ammons, a partner at Reed Smith who focuses on regulatory matters related to commodities, derivatives and digital assets. “I think that states have this idea that they are the ones who regulate gaming and things that look like gaming.”

While regulators in the 16 states involved in legal proceedings over prediction markets come from both sides of the aisle, the six the CFTC has sued so far  — Wisconsin, New York, Connecticut, Illinois, Arizona and Minnesota — all have Democratic attorneys general. 

“I cannot answer for the Trump Administration as to why they would have chosen to sue only certain states with Democratic leadership, bypassing others who have taken similar enforcement postures,” said Connecticut Attorney General William Tong, a Democrat, in a statement to CNBC.

The only action the CFTC has taken against a state with a Republican attorney general is in Ohio, where it filed an amicus brief defending its sole jurisdiction belief. 

Richie Taylor, a spokesperson for Arizona Attorney General Kris Mayes, said in an email he was limited in his ability to comment due to the ongoing litigation, but noted the bipartisan nature of the action by states. 

“Like red states and blue states alike, AG Mayes believes the CFTC is improperly encroaching on the right of states to enforce their gambling laws,” Taylor said. 

The battle for oversight of events contracts

A spokesperson for the CFTC denied that there’s anything involved in the commission’s legal strategy beyond a pursuit to defend its regulatory power. 

“These states sought to regulate or prosecute lawful, CFTC‑regulated exchanges that were operating fully in accordance with federal statutes, requiring the CFTC to intervene,” an agency spokesperson said in a statement. “It is based solely on the CFTC’s responsibility to ensure that states do not interfere with the trading of event contracts regulated under federal law.”

States argue that prediction market platforms are running illegal sports betting operations thanks to their related event contracts, which drive the majority of volumes on the platforms. The CFTC argues that its right to regulate swaps and derivatives places all event contracts, no matter the content, under its purview. 

In its lawsuits so far, the CFTC won a preliminary injunction in Arizona to stop the state from pursuing criminal charges against Kalshi, the largest domestic prediction market platform. In the other five states, cases are still ongoing and no initial rulings have been made. 

Separately, the U.S. Court of Appeals for the Third Circuit ruled that New Jersey can’t enforce gambling laws on prediction markets. But the legal battles are in the early days, and most following the space expect the final verdict will be determined at the nation’s highest court. 

“It has the makings of a real circuit split, which does seem to indicate a high likelihood that this would go to the Supreme Court,” Ammons said.

Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.