CFTC Sues Illinois, Arizona, Connecticut as Prediction Markets War Heats Up
The Commodity Futures Trading Commission (CFTC) is suing Illinois, Connecticut, and Arizona for allegedly attempting to regulate the U.S. prediction markets industry.
In a strongly-worded press release, the CFTC, which has federal regulation over ‘event contracts’, slammed state regulators for attempting to “outlaw, regulate, and otherwise restrain” prediction markets.
“The CFTC will continue to safeguard its exclusive regulatory authority over these markets and defend market participants against overzealous state regulators,” said CFTC Chairman Michael S. Selig.
“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.”
At a Glance:
- CFTC sues three states trying to regulate prediction markets
- Kalshi is among the big-hitters issued cease-and-desist letters in AZ, IL, CT
- States argue that prediction markets amount to taxable sports betting
- CFTC wants to protect exclusive federal regulation over prediction sites
Kalshi under attack from multiple states
Leading prediction market operator Kalshi has received cease-and-desist letters from gaming regulators in AZ, IL, and CT over the past 12 months. The CFTC, however, maintains that it has federal jurisdiction over companies like Kalshi — not the individual states.
Arizona, Illinois, and Connecticut have had regulated sports betting for some time and are keen to bring prediction markets under their control, too, plus a sizeable slice of any related gaming revenue.
Arizona also filed a criminal case against Kalshi executives, while Nevada recently ruled to extend its ban on Kalshi. The company is appealing a Massachusetts judge's ruling that bars it from offering sports event contracts.
Prediction markets vs. fixed odds sports betting
Prediction markets operators, including Polymarket and New York-based Kalshi, offer event-based ‘contracts’. Players can buy contracts on a range of events, including sports, entertainment, and elections.
Contracts carry a set rate, say $2 on the Eagles to win the Super Bowl. Like a fixed-odds futures bet at the bookies, the player may win several times that amount.
Additionally, players can swap contracts with one another, with the platform collecting a transaction fee.
Predictions 'no different from illegal sports betting,' states say
Kalshi argues that event contracts are no different from financial swaps and are therefore permitted under CFTC rules.
However, state gaming regulators argue that sporting event contracts are no different from placing moneyline bets on a ball game.
The states, therefore, argue that prediction companies must have proper gambling licenses or cease operations. States also miss out on sizable gambling taxes.
New Jersey win for Kalshi
There is hope for Kalshi in its ongoing battle with the CFTC, after a federal appeals court ruled it could continue operating in New Jersey.
State regulators in the Garden State, the first in the U.S. to legalize online gambling, had challenged the practice. However, the U.S. Court of Appeals for the Third Circuit held that the NJ Division of Gaming Enforcement (DGE) lacked authority to prevent Kalshi from operating.
“Kalshi’s sports-related event contracts are swaps traded on a CFTC-licensed DCM [designated contract market], so the CFTC has exclusive jurisdiction,” said U.S. circuit judge David Porter.
Kalshi settles the controversial US-Iran war market
Prediction markets generate billions in trading volume among players and came into their own during the 2024 U.S. presidential election.
Many political event markets are vanilla, including the winner of the next primary or presidential election. However, sites like Kalshi have generated attention for offering markets on wars, in violation of U.S. financial rules.
Kalshi was forced to withdraw its market on the death of Iran’s supreme leader, Ayatollah Khamenei. And despite Democrats' calls to limit the sector, including bans on political events, President Trump has taken a lighter touch.
With federal backing for prediction market platforms such as Polymarket and Kalshi, states like Arizona and Illinois could face an uphill battle in enforcing a crackdown.
