U.S. states take prediction markets to court, arguing they amount to illegal gambling

Prediction markets are running into mounting regulatory pushback across the United States as state authorities increasingly frame these products as unlicensed online gambling rather than financial innovation. Platforms such as Polymarket and Kalshi have grown quickly by letting users take positions on outcomes tied to sports, elections, macroeconomic indicators, crypto assets and other social events, pitching the activity as "trading future outcomes" through event contracts. As participation and product scope have expanded, more states have moved to restrict or shut down these offerings through lawsuits, injunctions, cease-and-desist orders and investigations. The dispute has now widened beyond questions of any single platform's compliance. The Commodity Futures Trading Commission (CFTC) has escalated the fight by suing multiple states, seeking to assert that it has exclusive authority over event contract markets. The result is a direct confrontation between federal derivatives oversight and state-level gambling enforcement. States broaden actions as more platforms enter the space Enforcement is not limited to Kalshi or Polymarket. State actions have also named Crypto.com, Robinhood, Coinbase and Gemini, underscoring a shared concern: regulators say event contracts are being used to sidestep state gambling rules, sports-betting regimes and consumer protection requirements. Arizona, Connecticut and Illinois were among the earliest states to move against these products, taking actions against platforms including Kalshi, Polymarket, Crypto.com and Robinhood. Arizona went further, filing criminal charges against Kalshi and alleging it facilitated illegal gambling, including activity tied to election betting restrictions. The CFTC then sued the three states, arguing state gambling laws cannot be used to interfere with federally regulated derivatives markets. New York has intensified the confrontation. Attorney General Letitia James sued Coinbase Financial Markets and Gemini Titan, alleging their prediction-market operations constitute unlicensed gambling. New York says the platforms allowed users to trade on outcomes such as sports and elections without authorization from the New York State Gaming Commission, and also permitted participation by users aged 18 to 20 even though the state's minimum age for mobile sports betting is 21. Across these cases, states argue they are not opposing "prediction" as a concept. Their claim is that the platforms are repackaging wagers as financial transactions to avoid licensing, age limits, tax rules and consumer safeguards. From their perspective, many contracts look functionally similar to traditional betting: users risk money on outcomes outside their control and either profit if correct or lose their stake if wrong. Sports contracts are the main flashpoint. Massachusetts previously sued Kalshi, alleging it offered sports betting without proper authorization. Recently, 38 state attorneys general filed an amicus brief supporting Massachusetts and disputing Kalshi's position that sports predictions are simply financial instruments. Michigan, Washington and Wisconsin have advanced comparable arguments, focusing on whether residents are being offered sports or event bets without required state gambling licenses. As major trading and crypto platforms join the category, the issue is no longer confined to niche prediction-market operators. It is becoming a broader compliance problem for exchanges, brokers and crypto firms that are integrating event contracts into their product suites. Platforms' position: federally regulated markets, not casinos Kalshi, Polymarket and others have responded by emphasizing regulatory classification. They argue event contracts are derivatives regulated by the CFTC, so states should not be able to restrict them under local gambling laws. If states succeed in treating event contracts as gambling, platforms would face a patchwork of state-by-state licensing, age requirements, tax frameworks and market access rules. Platforms also argue the products serve a market function beyond entertainment, claiming they support real-world price discovery. Elections, interest rates, inflation, policy decisions, geopolitical developments, sports and crypto events all involve uncertainty, and prediction markets say they translate participants' capital-backed judgments into traded, observable probabilities. CFTC lawsuits turn platform disputes into a federal-state clash The conflict sharpened when the CFTC sued Arizona, Connecticut and Illinois to block them from applying gambling laws to prediction markets, arguing the products fall within federally regulated markets. The agency has also sued New York State, asserting the state's actions against prediction markets intrude on the CFTC's exclusive authority. New York illustrates the fault line. State officials argue "a gambling activity by another name is still gambling." Federal regulators counter that states cannot reclassify federally overseen derivatives activity as local gambling. Courts offer mixed signals; risks vary by contract type Prediction-market operators have not been without wins. In a key New Jersey case, the Third Circuit Court of Appeals recently ruled in favor of Kalshi, finding New Jersey cannot regulate Kalshi's prediction-market business. The decision bolsters the argument for federal preemption and supports Kalshi's national expansion strategy. Still, platforms face uneven risk across jurisdictions and products. Sports contracts, election contracts, crypto-asset-related contracts and macroeconomic contracts may receive different legal treatment depending on the state, the court and the specific contract design. Regulatory pressure also goes beyond licensing. As tradable categories expand into sensitive areas such as elections, wars, diplomacy and judicial events, additional concerns emerge, including political ethics, insider information and national security. From growth narrative to compliance showdown Prediction markets built momentum on an idea that uncertainty can be priced and traded. Polymarket grew through political and crypto contracts, Kalshi leveraged its status as a regulated exchange to broaden event contracts, and firms such as Coinbase, Gemini and Robinhood have moved into the space. Now the industry is being pushed into a new phase: proving that event trading is not simply a more efficient form of gambling; demonstrating that market information advantages will not be abused by insiders, candidates, athletes, officials or platforms; and navigating the tension between federal oversight, state gambling rules and consumer protection. The outcome hinges on the federal-state power struggle. If the CFTC ultimately prevails, prediction markets could gain a clearer federal compliance pathway, accelerating institutional adoption and broader platform integration. If states win key cases, expansion could be reshaped by a fragmented regime with differing restrictions across sports, elections, entertainment and political events, raising compliance costs and limiting scale. With states, the CFTC, courts and platforms now fully engaged, the regulatory battle over prediction markets is entering its opening act. Related content: "Stuck Polymarket: The Real Test After the Traffic Dividend Has Arrived" (Author: Asher)